Read between the lines: How can rising interest rates affect your finances?
We regularly bring you a column from Simon Read, a personal finance expert with extensive experience in helping people make the most of their money. In his last piece, Simon provided some pointers on planning for retirement.
The much-anticipated interest rate rise finally hit at the beginning of November. It was interesting for two main reasons.
First is the fact that it was the first rise in the Base Rate for 10 years. Do you recall what it climbed to then, back in July 2007? The base rate actually went up 0.25% to 5.75%. That seems incredible now, when we’ve experienced almost a decade of record low interest rates.
In fact it’s only been for 18 months that the rate has been at its all-time record low of 0.25%. This month’s rate increase saw it climbing back to 0.5%, where most savers and borrowers have experienced it since the Bank of England lowered it to that level to March 2009.
But the second interesting thing about the rate rise is what it tells you about your money. If you haven’t already got the message that it should be a wake-up call for you to check your finances, then now is the time to get your house in order.
It’s extremely likely that the rate increase is just the first of many over the next 12 months or so. The Bank of England will need to act again to protect Sterling ahead of Brexit and to counter rising inflation. So you should be acting to protect your interests, with interest being at the forefront of your mind.
Think about your savings. While a rise should mean better interest offered at banks and building societies, rates are still likely to remain paltry on deposit accounts. That means thinking carefully about where to stash your nest egg and making the most of alternative options such as peer-to-peer lending or, if you’re prepared for greater risk, stock market-linked investments.
What about your mortgage? If you’ve got a fixed rate loan then you won’t notice the effect of any interest rate rise until the end of your deal. But with further increases ahead, by the time you arrange a new deal, charges may be much higher.
For that reason it’s worth looking at switching sooner.
However you need to check if there are any early repayment penalties on your existing deal and do your sums carefully to ensure that switching will actually be worthwhile in the long-term, especially after taking into account any new charges you may incur.
If you have a variable rate mortgage or tracker then you will be hit by the rate rise much sooner.
By how much? The Nationwide building society reckons a 0.25% rate rise would increase monthly payments by £15 to £665 for the average variable mortgage, or an extra £180 a year. Depending on the size of your mortgage, the rate increase could cost you much more.
However much it is, it’s worth checking out fixed mortgage deals to work out if it’s worth changing. If you have a low variable rate, then you should probably stick with that for the moment. If you’re paying 3% or more, however, then you would be better off finding a lower fixed rate.
And in the months ahead keep an eye on rates.
Some lenders priced in the rate rise to their mortgage rates some weeks ahead. If you see a trend for fixed rates to start to rise, that may be the time to act, before the best low deals disappear altogether.
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