What an interest rate hike would mean for your finances
Everyone in the UK will be affected by the rise in prices – from a higher gas bill to more difficult choices at the grocery store.
The idea of raising interest rates is to keep current and expected price increases in check, as measured by the rate of inflation.
Higher interest rates make borrowing more expensive. For households, this could mean higher mortgage costs, although – for the vast majority of homeowners – the impact is not immediate, and some will skip it altogether.
Analysts also warn that the potential benefit of a better return on savings may be dampened.
Impact on owners
Even before a decision is made by the Bank of England’s monetary policy committee, there are signs that the era of ultra-low mortgage rates is over.
Some lenders have already started raising rates for those applying for a new home loan.
It has been an extraordinary time for cheap mortgages, and – in recent months – there have even been some great deals for first-time buyers unable to offer a large amount of down payment.
Brokers expect any rise in mortgage rates to be “slow and measured,” which would mean mortgages would remain cheap by historical standards for some time.
It is a little discussed fact that only about a third of adults have a mortgage.
About a third rent their home, another third have never had a mortgage or paid it off. These figures come from the English Housing Survey, which is geographically limited, but one of the most comprehensive guides available.
According to banking organization UK Finance, some 74% of mortgage holders in the UK have fixed rate agreements and therefore would not see a change in their repayments until the end of their current term.
Of the others, 850,000 owners benefit from follow-up offers and the remaining 1.1 million benefit from standard variable rates (SVR). These are the people who are likely to feel the immediate impact if the discount rate increases.
If their rates reflected a rise in the bank rate to 0.25% from its current level of 0.1%, a typical tracker mortgage customer’s monthly repayment would increase by £ 15.45. The typical SVR customer would pay an extra £ 9.58 per month, according to figures from UK Finance.
If there was a much larger increase in bank rates to 1% and lenders increased their rates by an equivalent amount, the average tracker customer would pay £ 93 more per month, and the typical SVR customer would pay £ 57 more per month.
This would be a further squeeze on their household budget at a time when people are used to years of cheap borrowing and relatively slowly rising prices.
Every mortgage applicant since 2014 should have proven in a stress test that they can pay at a rate of around 6% or 7% – the idea being that a small rate hike can be uncomfortable, but not unmanageable, for owners.
Katie Brain, of independent analysts Defaqto, says rates “must have started to rise at some point,” but reminds anyone looking for a mortgage that all the benefits of a low rate deal could be wiped out if the applicant ignores costly fees.
Time to save?
A collective sigh of relief would be heard from savers in the event of an interest rate hike, but it could quickly be followed by a strong inspiration.
Analysts warn that even if the bank rate increases, there is no guarantee that this will be reflected in better returns on savings.
Savers are often borrowers too, but money in the bank has indeed fallen in value for some time.
Anna Bowes, of the Savings Champion website, says rates have come down over the past year, even though the Bank of England’s base rate has remained unchanged.
People get pennies of interest for every £ 100 they keep in savings for a year. An increase in the bank rate will not change much in this scenario.
The average interest rate for an easy-to-access account that you can open today is 0.14%. For easily accessible accounts closed to new customers, it is 0.22%.
The most profitable easy-to-access account has an interest rate of 0.66%.
Sarah Coles of investment firm Hargreaves Lansdown says many savers have stopped paying much attention to their returns.
“When we asked people if they knew what they were making with their savings, two in five admitted they had no idea,” she says.
“Even those who think they have control over their savings may well be wrong. When we asked people what they were making with their easy-to-access savings, most of them grossly overestimated.”
