Last week, the Bank of England raised interest rates from 0.25% to 0.5%. This is the first time in over 10 years we have seen such a rise. Over the next 3 years, it has been predicted that interest rates will rise twice more too. So, how does this affect you?
Higher mortgage payments?
Unless you have a fixed-rate mortgage, you may be one of a probable 4 million householders who will now have to pay higher interest on their mortgage payments. Variable-rate mortgages or ‘tracker rates’ will be greatly affected by the recent rise in interest rates. For example, if you’re on a variable rate mortgage and have an outstanding balance of £200,000 to pay, and your payments are £900 per month, the increase will see you paying an extra £25 per month, which is an additional £300 per year. On the other hand, if you have a fixed-rate mortgage, which is due to finish in the next 12 months, you may be facing a steep increase in your monthly mortgage payments after you reach the end of your term.
Higher returns on savings and ISAs?
It’s not all doom and gloom! For those of you who are savers with variable-rate mortgages, you may find that your increased mortgage interest payments could be offset by the increased interest on your savings accounts. Many banks and financial organisations have stated they will be passing the increased interest rate onto customers, which means you should expect better returns on your savings accounts. For example, if you have £10,000 saved in an ISA, you will have a better income, rising from £30 to £55.
A higher threat to investments?
Interest rates will have an impact on the stock market, but this could turn out to be more of a correction rather than a major hit. Some investors may see less attractive income streams, some may rush to sell, whereas others may choose this time to buy. Strategic bond funds can be a better way to minimise risk as fund managers have more freedom to invest in a mix of high-yield, better quality government bonds. Please talk to a professional if you are looking to change or review your existing investment strategy.
Higher-income for pension annuities?
As interest rates help providers decide on the annuity rates for retirees, the recent rise may lead to more income. However, this is still yet to be determined and the effect may only be very slight. Some providers increased their annuity rates before the expected interest rate rise to compensate for this. There could be costs, risks or benefits by delaying the purchase of your annuity. Therefore, if you’re looking to buy an annuity with your pension, and you’re unsure how the recent rise will affect you, please talk to one of our financial planners as soon as possible.
High time to create a sound financial plan
The recent rise in interest rates offers some opportunities for savers, despite the effect on mortgage payments. Therefore, now is a really good time to look at your savings and investment strategy to make sure you have a sound plan in place to take you to where you want to be in the future. Your savings and investment strategy will depend on the type of savers account(s) you have, your level of risk, as well as the number and diversity of fund options in your portfolio. Make time for a financial review today, so you can make the most of your hard-earned money.