The interest rate rise- how will it affect your finances?
21/09/2015
Britain has enjoyed record low interest rates for more than six years, but it seems that the time of the lower than low interest rates will soon be coming to an end. Economists have predicted that the UK base interest rate will rise from its current level of 0.5% to 0.75% in early 2016; and will eventually increase all the way up to 1.7% at the end of 2018.
Interest rates have been at their record low for so long, many people may not be aware of how things might be about to change. The base rate has a big effect on almost all of the UK’s financial products, and could have an effect on your day to day finances as well. We are here to explain how you might begin to see the effects of the base rate rise.
Mortgages
Mortgages are the product most likely to be effected by the base rate increase, and people may be unprepared for the changes it might bring.
If you have a fixed rate mortgage, your monthly payment will not be immediately effected by the base rate rise. You will need to be aware that when your fixed term ends, you may have to pay more than you have been used to in the past.
You will more likely be affected by the looming rate rise if you are on a variable rate mortgage. If you can, look to see if you can change to a fixed rate mortgage as soon as possible (most economists believe that rates are not going to get much better than they are now). This way, you will know how much you will be paying each month and won’t get a nasty surprise come 2016.
If you are unable to get a fixed rate deal, check what your standard variable rate (SVR) stands at. If it is at 5% or over, it is unlikely that lenders would increase the SVR with a base rate rise as small as 0.25%.
If you are on a SVR of less than 5% you may see your monthly payments increase along with the rise.
If you are on a tracker mortgage, which follows the base rate, you will also see your monthly payments increase. This could be anything from £13 a month for a mortgage smaller than £100,000 up to £31 a month.
The base rate rise will not be a dramatic jump, but instead will be a gradual rise. Even though at the beginning you might only see a small rise in your monthly payments, someone with a mortgage of £150,000 could eventually find themselves paying £161 a month more.
Savings
Saving interest rates have been dismally low for the last few years, but are beginning to improve and the impending rate rise has started to put pressure on some savings providers to increase rates.
There is no guarantee that savings rates will increase, as new government rules introduced in 2012 meant that banks no longer needed to rely on saving deposits for capital. Some banks may even look to increase their profit margins by not increasing rates when the BoE does. To combat this, make sure you shop around for the best deal being offered and don’t be tempted by attractive short term rates.
Loans and credit cards
Almost all personal loans offered are on a fixed interest rate, so it is unlikely that you will see you loan payments rise if you already have one.
For new customers, there may be an increase in prices, but probably not an immediate one. Personal loan interest rates will probably absorb a 0.25% rise, and will only start to be significantly higher as the rate gradually increases.
Credit card rates are not explicitly linked to the UK base rate, but Halifax has confirmed that they would increase credit card rates with any increase by the BoE. Again, it is worth checking out the different levels of interest offered by various banks to make sure you are getting the best deal.
With the base rate increase, it is inevitable that some people will see their monthly mortgage payments increase, as well as their other finances being affected. The best way to combat this is to be prepared. If you need any questions answers or are looking for guidance, feel free to ask us a question online or give us a call on 0800 092 1245.
Let us know how you are preparing for the base rate rise by tweeting us @financialuk
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