Interest rates have risen to 2.25%, their highest level for 14 years, meaning good news for savers but misery for mortgage holders, many of whom who are already struggling to cope with higher costs.
The Bank of England has made seven consecutive rate increases since December to try to slow inflation, with further rate hikes expected in coming months. Here, we look at what the latest increase means for your money.
If you have any type of variable rate mortgage, then you’ll usually see your monthly mortgage costs rise very soon after rates have increased. According to financial website Moneyfacts.co.uk, the average standard variable rate is currently 5.4%. This is the rate you usually move onto automatically when your mortgage deal ends, unless you re-mortgage to new deal. If this rate rise is passed on in full the average SVR will reach 5.9%, which for someone with a £300,000, 25-year repayment mortgage, could mean their monthly payments go up by £91 a month.
Sarah Coles, senior personal finance analyst, Hargreaves Lansdown said: “Three-quarters of mortgage holders are protected by a fixed rate deal, but when their mortgage expires, they could be in for a horrible surprise, because they’ll be hit with all the rate rises at once.
“Even before this rise was announced, Moneyfacts calculated the average 2-year fixed rate deal at 4.24%. Two years ago, it was 2.24% - so someone whose 2-year mortgage is expiring right now faces a major jump in their monthly payments.”
If your mortgage deal is due to finish soon, it’s worth starting your search for your next mortgage sooner rather than later, as rates are expected to continue rising. Most lenders will let you secure your next deal up to six months before your current deal finishes, so make a note of when this is and get advice from a mortgage broker at that point if you need help choosing the best deal to suit your needs.
Rising interest rates are good news for savers, as they mean higher returns. However, it’s worth keeping a careful eye on whether your savings provider passes on any increases, as not all do. If your rate hasn’t changed despite recent rate rises, it’s time to vote with your feet and move to a higher interest-paying account.
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Remember that even if you are in an account paying competitive returns, high inflation will still be eating into the purchasing power of your cash. Inflation hit 9.9% last month, which according to analysis by interactive investor, is over 14 times more than the average savings rate on an easy access account over the same period.
Myron Jobson, senior personal finance analyst at interactive investor said: “It could take months for the increase in interest rates to trickle through to savers – although there are no guarantees. Before the latest increase, the base rate was more than 2.5 times more than the average savings rate on an easy access account in August (1.75% versus 0.69%).
“The pummelling of cash savings in real terms provides impetus to invest, which could offer inflation beating return over the long term, for patient investors willing to take the rough with the smooth. The current level of stock market volatility might appear daunting. Investing comes with inevitable risk, but taking a long-term view means you can smooth out some of those highs and lows whilst benefiting from the long-term potential that comes with this approach.”