The Bank of England has been hinting that interest rates would rise for several years now, but has held them at 0.25%. A rise now looks increasingly likely, with the first hike expected in November 2017. Rates could double from 0.25% to 0.5%. What does this mean for you?
If you’re a homeowner
You’ll likely see an increase in your monthly mortgage repayments if you are on a variable rate or tracker mortgage. If you have a fixed rate mortgage, you would be protected from any increase, but only until the end of your deal’s fixed term.
The average UK standard rate mortgage is 4.6%. According to Moneyfacts, someone on that rate with a repayment mortgage outstanding of £200,000 and 25 years remaining would pay £28.72 per month extra if the rate went up by 0.25%. If rate rises continued and went up by say 1%, that same mortgage would cost £117.10 per month more.
What you should do:
If you have a short-term fixed rate, tracker or variable mortgage, you may be vulnerable so it would be important to have a buffer in place. Your best move would be to speak to a mortgage adviser to work out how you may be affected if interest rates were to rise. Longer term fixed rate mortgages are quickly becoming popular and it’s easy to see why. With interest rates as low as they have ever been, now may be the best time to secure a low long-term fixed rate mortgage deal.
If you’re a tenant
You may be under the misguided illusion that you won’t be affected by interest rates rises. Think again. Any increase in mortgage costs would most likely be passed onto you if your landlord’s mortgage repayments were to increase. Just hope your wealthy landlord doesn’t have a mortgage and doesn’t read the papers!
What you should do:
Whilst it would be sensible to have a financial buffer in place, never underestimate your negotiating powers as a tenant. Your landlord relies on your rent and many landlords would consider fixing your rent for a fixed term – typically 2 years at a time, to prevent the upheaval and cost of finding a new tenant. Ask the question. You may be surprised by the answer.
If you’re a saver then this should be good news, right? Not necessarily, because whereas Banks are trigger-happy in passing on interest rate hikes to borrowers, the same Banks are infuriatingly slow in passing on interest rises to savers. This time around however, things may be a little different. With savers outnumbering borrows by around seven to one, many Banks have pledged to give a better deal to savers as soon as interest rates rise. We shall see.
What you should do:
You may want to hold off before deciding on any long term fixed rate savings deal. These deals should get better as rates rise. The average easy access savings account now pays just 0.4%. Two years ago, it was 0.66%. Five years ago, it was 1%.
Even if savings rates were to rise to 1% again, that would still be a poor deal for those saving over the long term. With inflation currently running at 2.8%, a 1% savings rate would still lead to long term capital depreciation. My advice would be to speak to your independent financial adviser now, especially if you want your longer-term savings to keep up with the rise in the cost of living.
