Interest rates have risen again, the second rate increase in less than two months, but what do higher rates mean for you?
The Bank of England’s nine member-strong Monetary Policy Committee voted by a 5-4 majority to raise the base rate from 0.25% to 0.50% on Thursday, with many commentators predicting further increases this year.
Low interest rates in recent years have meant exceptionally cheap mortgages for homeowners, while savers have really suffered, earning miserable returns on their hard-earned cash.
Here, we look at what today’s interest rate rise is likely to mean for you, whether you’re a saver or a homeowner.
How much of an impact today’s interest rate rise will have on your mortgage payments depends on which type of deal you have.
If you’ve locked into a fixed rate mortgage your payments won’t increase even though interest rates are going up. Remember though that your fixed rate deal won’t last forever, so you’ll need to factor in higher payments when it ends. If you’re worried about this, and you can afford to, you might want to think about making overpayments to reduce the amount you owe.
Tracker mortgages track the Bank of England base rate, plus a set percentage, so your mortgage rate will increase in line with Thursday’s interest rate hike. Rates usually increase on the first day of the month following a rate rise.
For example, if your tracker is the base rate plus 1.50%, your rate will increase from 1.75% to 2%, in line with the increase in the base rate.
If you have another type of variable rate mortgage, such as a discounted rate deal, then you will now have to wait to see how your lender reacts to the increase in the base rate. Changes to their standard variable rates are up to their discretion and so any change could be less, the same or a bigger increase than the rise in the base rate. Bear in mind that if you’re on your lender’s standard variable rate, you should be able to save hundreds, if not thousands of pounds by re-mortgaging to a more competitive deal.
There are currently no savings accounts which keep pace with inflation, so any increase in rates is welcome news. However, even if returns rise following the interest rate decision, they will still be a long way off matching rising living costs.
Most savings accounts pay a variable rate of interest. When interest rates go up, in theory the rates on savings accounts should go up too. You may therefore see the rate on your account increase in line with the base rate, although not all providers will pass on the rise in full.
Some will only raise rates by a small amount, while rates on other accounts may not move at all. If your savings provider doesn’t announce an increase in the weeks following the rise you should consider moving your money to a more competitive account.
Rachel Springall, finance expert at Moneyfacts.co.uk, said: “Easy access accounts remain a favourable savings account for consumers who want flexibility with their cash. Savers may need to act quickly to take advantage of new arrivals as just last week we saw decent offers re-introduced to the market, including a 0.71% deal from Investec Bank which was withdrawn earlier this month.
“Clearly, there is still some competition in the market, but savers may not have long to grab such lucrative offers and sitting on the fence could see them miss out.”
Fixed rate bonds
If you’re currently locked into a fixed rate savings account, then your rate won’t change even though the base rate has risen.
If you’re considering tying up your savings in a fixed rate account, higher interest-paying fixed rate bonds should become available over the next couple of weeks. However, none of these accounts will pay returns that can keep pace with rising living costs.
Heather Owen, financial planning expert at Quilter said: “Unless banks offer interest rates that match inflation, which is unlikely, cash will be losing value in real terms. However, there are steps you can take to help your savings go further.
“While we have seen increased market volatility in recent times, a well-diversified portfolio of investments remains the best option for long-term savers who are looking for their money to grow. Putting money to work in the stock market for five years or more gives it the best chance to grow at a greater rate than inflation. The sooner you invest and the longer you do it for, the more likely you are to have the potential for healthy returns regardless of short-term blips. However, it is important to remember that the value of investments can go down as well as up and you should seek financial advice where possible.”