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What does the rise in interest rates mean?

GREAT SAVE: Those who have been putting money away regularly will benefit from the rates rise

THE BANK of England has raised interest rates by 0.25 percent- age points to 0.5 per cent – which marks the first increase in a decade.

The rise, however small it may seem, could knock your finely tuned monthly house- hold budget out of kilter.

Put simply, the change is likely to spell bad news for many mortgage holders. However, it is not all doom and gloom as savers, who have been starved of healthy returns amid record low rates, are likely to benefit.

Here’s a bite-sized summary of what the interest rate hike means for you and your finances.

Savers

Those who regularly squirrel money away into a savings account or cash ISA stand to gain most from the change. Savers have struggled to find decent returns in the era of rock bottom interest rates, with some savings accounts paying as little as 0.05 per cent in interest.

In other words, someone with £1,000 savings pot would earn a measly 50p every year. If the rate rise is passed on, the payment would rise to £2.50, so £3 in total. However, whether banks and building societies will actually pass on the increase to savers remains to be seen. Some may opt against doing so to prop up their profits – although this would likely lead to public uproar and loss of custom.

Charlotte Nelson, finance expert at comparison personal finance data firm Money-facts, said: “Given that it has been such a long time since an interest rate rise, it is very difficult to tell whether providers will increase their rates straight away or decide to wait and see what the rest of the market does.

“Anyone looking for a savings deal now will need to keep on their toes and check the best buys to ensure they are still getting the best rate.”

Mortgage owners

There are around nine million British households with a mortgage. Of these, nearly half have a standard variable rate (SVR) mortgage, which goes up or down according to changes in interest rates.

There is a possibility, however slim, that those on SVRs will not experience an increase to their monthly mortgage repayments. This is because a SVR is set by the lender, who could choose to absorb the interest rate increase to, say, dissuaded customers from shopping for a better deal.


THE MATHS BEHIND IT ALL: This table shows how much more you would have to pay on a £200,000 mortgage where the current interest rate is 2.5 per cent and monthly repayments are £897, if interest rates were to increase further (Photo credit: Money Advice Service)

But if you are on a tracker, your mortgage will definitely get more expensive because these products follow or ‘track’ changes in interest rates. Those with a typical £100,000 variable rate mortgage will have to shell out an additional £13 a month if their lender passes on the 0.25 per cent interest rate rise to borrowers, according to the Building Societies Association.

However, analysis by independent think-tank Resolution Foundation found that only 11 per cent of British households will actually be affected. This is largely because fewer people own homes and more people hold fixed rate deals.

Changes in interest rates have no bearing to borrowers of such mortgages – referred to as fixes in the financial industry. Here, the rate of interest remains the same until the end of the fixed period.

It is little wonder, therefore, that many mortgage brokers – those who facilitate deals between borrowers and lenders – anticipate an uptick in the number of applications for fixed rate deals in the wake of the rate hike.

If you haven’t changed your mortgage in the past five years, you are probably on an SVR deal, and therefore susceptible to any rate increases. There is a strong possibility of another rate rise soon, too.

Mark Carney, Governor of the Bank of England, has indicated that he expects two more increases of 0.25 per cent over the next three years, so it is worth considering switching to a fixed-rate deal.

If you don’t know where to start, consult a mortgage broker. They are experts in this field and will do all the leg for you – albeit for a fee.

What about credit cards?

It is worth mentioning the hike in interest rates has absolutely no influence on the rates charge by credit card companies. In fact, most unsecured borrowing, such as a personal loan to finance buying a car, won’t usually be affected by an interest rate change, according to the Money Advice Service. This is because you agreed to a fixed rate of interest when you took out the loan.

What about Christmas spending?

Consumer shopping habits are unlikely to change because of the hike in interest rates, meaning Christmas retail sales will hold up according to Lisa Hooker, UK head of consumer markets at PwC.

She said: “Consumers will begin to feel the effects of the rate rise in 2018 and, when this happens, it is families who will generally be hit harder than the young or retired.”

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