How will the interest rate hike affect you?
This Thursday, the Bank of England decided to raise the base interest rate from 0.5% to 0.75%.
The hike will put the rate at its highest level since March 2009 and is only the second increase its seen in a decade.
Those with savings accounts are likely to welcome the change, whilst people with variable-rate mortgages look to face extra costs.
Why has interest increased?
The decision was influenced by hopes for a stronger economy, increasing consumer spending, stable employment levels alongside the expectation that wages will continue to rise.
Simon Jack, Business editor for the BBC, explains that the increased interest rates are largely a result of domestic wage inflation. This is more self-perpetuating than inflation associated with rising import costs and energy prices.
Who and what will this affect?
In short, these changes will not have a dramatic effect, but essentially a hike to interest rates will mean more money in the bank for savers and lenders but less for those borrowing money.
The 0.25% rise will affect the total of three-and-a-half million residential mortgages that use variable or tracker rates.
The average standard variable mortgage rate is 4.72%, but this will go up, and the annual cost of a £150,000 variable mortgage is likely to increase by £224, according to the BBC.
Only 35% of the 9.1 million mortgages in the UK use variable rates, much fewer than the 70% majority in 2001.
The Guardian writes that “longer-term fixes are likely to be much more popular this year”.
This poses a solution to variable-rate mortgages.
Currently, there is a greater availability of 10-year fixes at interest rates that are only slightly above the two- or five-year fixes that most households take out.
HSBC, and Coventry building society are offering 10-year lock-ins at only 2.49% and 2.39% respectively.
Analysts predict that the property market is likely to remain unaffected by the change.
Unfortunately, savers are unlikely to see the benefits of the Bank’s rate rise.
After the last rate rise in November, half of savings accounts did not move at all.
There is no guarantee that the interest hike will reflect in the interest paid to savers, and now no easy access savings account at a major High Street bank pays interest of more than 0.5% - with the average at the ‘big five’ high street banks at only 0.23%.
However, any rate rise may be beneficial for retirees buying an annuity - a financial product that provides an income for life.
Rather than savings, these ‘gilts’ can be expected to provide a greater yield as a result of the increasing interest rates.
Personal loans and credit cards may get more expensive. However, the 0.25% increase should have little impact on a credit card interest rate. These generally stand at around 18%.