Recently, the Bank of England raised the base interest rate from 0.5% to 0.75%. This is only the second time interest rates have risen in over a decade, but it is thought that the base rate could increase again, possibly as much as 1.5%. So, how will this affect you in terms of savings, property and mortgages? We’ve pulled together a summary of the recent base rate change, which looks at how the latest rise could affect your finances:
How does the base rate affect me?
The base rate is the Bank of England’s official borrowing rate; this is the rate it charges other lenders and banks each time they borrow money. Therefore, any changes to the base interest rate has a direct influence on the way we save and borrow money. When the base rate increases, this tend to have an impact on certain mortgages, savings accounts and when you apply for new loans.
Increase in mortgage rates
When it comes to mortgages, if you’re on a fixed rate, you won’t be affected. However, if you’re on a ‘tracker’ mortgage, which most commonly works by tracking the base rate, your mortgage rate will go up, and this is likely to be the same if you’re on a standard variable rate too. For example, if you have a £200,000 mortgage and your tracker mortgage repayment is £897 per month, then this would rise to £922 – an extra £25 per month, which totals an additional £300 per year. Although the number of people on tracker and variable rate mortgages has fallen, there are still many people with these mortgages, which means the base rate increase will have a direct impact on their finances.
If you haven’t reviewed your mortgage in a while, then we would advise checking your existing mortgage deal, as it might be worth considering remortgaging your property. Always discuss your mortgage with a qualified mortgage adviser before making any changes.
Good news for savers
Although banks can be slow when it comes to applying changes in interest rates to savings accounts, most savers will benefit, albeit only in a small way, if you have an easy access high street bank account. Usually, the main banks offer around 0.23% interest, so this should rise to around 0.3% – 0.4%. However, if your savings account offers less than 1%, then it could be worth switching to an ISA or a higher rate savings account. Some accounts offer incentives for switching, such as cashback, but always make sure you fully understand the terms of any savings accounts you’re considering. For advice on savings, please speak to our financial planning team.
No changes to loans – unless new
Most loans are fixed-rate, so if you have an existing loan, you shouldn’t see much of a change. However, if you’re considering taking out a new loan, then you should consider doing this sooner or later, as the increased base rate is likely to have an impact on your repayments. Before you take out a loan, always check all the options available to you and seek professional advice on your financial planning. Sometimes, there are other routes, which you may not have thought about and will help to prevent the possibility of racking up future debt.
To conclude – although the recent base rate rise could be bad news for some mortgage holders, the changes in interest rate could benefit many savers. If you haven’t carried out a full financial review recently, then now is the time to do so. Check your mortgage details and savings accounts to see whether you might be better off switching. A sensible approach to financial planning will result in a strategy which should offset any pressures from interest rate rises, both now and in the future. By creating a strong financial buffer, you can rest assured in the knowledge that you and your family are protected from any future base rate increases.
If you would like a financial review of your pensions, savings and investments, then please get in touch and speak to our financial planning team. We will look at your individual situation and offer different options to help you become more financially secure.