Higher Interest Rates - What will they mean for you?
Mark Carney has recently revealed that interest rates set by the Bank of England will soon be raised. This will mark the end of the period of record breaking low interest rates that has been going on for several years. The rise is now predicted to come at some point in 2016 with the exact date remaining unclear. It is also believed that the rates will not be shooting up to their previous level of 5% upwards, instead a slow increase is expected. The governor of the Bank of England has said that the rise will be gradual and the new normal level will be closer to 2.5%.
What will this mean for mortgages?
If the case rate were to rise by 0.5%, as it is expected to do, this would mean an increase of £38 per month on a standard £150,000 mortgage. This would be the case if it is a tracker mortgage that fixes itself to a set percentage above the base rate.
Mark Harris, who works for SPF Private Clients, stated:
ìIf you are on a variable rate, and would struggle to pay your mortgage if rates rose, it is worth locking into a fixed rate. There are some really cheap deals on the market, with two-year fixes starting at 1.05% and five-year fixes from 2.14%. In all likelihood we have now seen the cheapest of these fixed rates, so donít delay if you want one of the more competitive deals in the hope that a better rate will come along. It probably wonít.î
Mortgage broker at Anderson Harris, Adrian Anderson, expanded:
ìFive-year fixes look particularly good value, but donít fix for that long if there is a chance you might move in two or three years ñ or youíll be hit with a hefty penalty.î
What will this mean for savings?
It would make sense to assume that if interest rates are going up, then at least this will be good news for your savings accounts. Unfortunately this is not necessarily the case according to Anna Bowes of savingschampion.co.uk:
ìThe traditional relationship between the Bank of England base rate and savings rates has been severed for some time and we donít think it will necessarily be restored.î
When the base rate started to fall at the start of the economic crash, the interest rates paid out on savings accounts also went down. However savings accounts' interest rates also when down in 2009, when there was no decrease in the base rate. This was made worse in 2012 when the government introduced funding for banks that meant these institutions relied less on savings for capitals.
Anna Bowes believes the answer to this situation is to be prepared to lock your money in for a longer period of time at a fixed rate:
ìI know peopleís instinct will be not to lock in for a long time, but the key point is that there is no guarantee that because Bank rates are going to rise five-year fixed rates will do the same.î
ìFixed rates donít follow base rates ñ they have already factored in expectations of a rise. All the time you wait is time youíre missing out on the higher interest rate these accounts offer.î
At the moment the most competitive deal on offer for a five year fix is being offered by Paragon Bank, with a rate of 3.06%. This represents a rate almost twice as large as the best deals available on an instant access account.
What will this mean for personal loans and credit cards?
The interest being offered on personal loans dropped to an all time low in the spring months of 2015. The average amount being paid on a £10,000 loan was as low as 4%. This is even more significant when you consider the fact that most personal loans have fixed rates so the base rate increase won't affect the amount that the customer pays.
Andrew Hagger stated:
ìAs soon as we get a rise I think rates will bottom out, but the market is so competitive that I donít think providers will want to raise prices straight away,î he says. ìThey will probably absorb a 0.25% rise to stay at the top of the tables and only start edging up if we see more increases.î
Traditionally credit cards are not linked to the interest rates set by the Bank of England so no huge changes are expected in that area. However Halifax did state back in 2013 that it would raise its interest rates in line with any change in the base rate set by the Bank of England.