What does the in­ter­est rate rise mean for you?

Ex­plain­ing the var­i­ous im­pli­ca­tions of the lat­est rate hike from the Bank of Eng­land

Shares - - MONEY MATTERS - Laura Suter, per­sonal fi­nance an­a­lyst, AJ Bell

In­ter­est rates have risen for only the se­cond time in the past decade, and are now the high­est they’ve been since 2009 – when rates were slashed af­ter the stock mar­ket crash.

The Bank of Eng­land’s mon­e­tary pol­icy com­mit­tee de­cided to in­crease the so-called Bank Rate from 0.5% to 0.75%. The nine-strong com­mit­tee voted unan­i­mously on the move, say­ing that the UK’s econ­omy was now strong enough to with­stand the hike.

The move had been an­tic­i­pated ahead of the an­nounce­ment, as in­fla­tion (the mea­sure of the rise in prices in the UK) has been above the Bank of Eng­land’s 2% tar­get for a long time.

How­ever, the Bank had been ex­pected to in­crease the rate in May this year, but U-turned at the last minute af­ter the Beast from the East cold weather at the start of the year ham­pered con­sumer spend­ing – hit­ting the econ­omy’s growth.

Last week’s move is the first time in­ter­est rates have been set at 0.75%, and fol­lows a hike from 0.25% to 0.5% last Novem­ber. But what does the rate hike mean for you and your fi­nances?

THE EF­FECT ON SAVERS

Those with sav­ings sit­ting in cash bank ac­counts may be jump­ing for joy, that in­ter­est rates will move off record lows and they will get higher re­turns on their money.

How­ever, that ex­cite­ment may be short lived as banks rarely pass on all of the rate hike to their cus­tomers.

Since the in­ter­est rate rise in Novem­ber 2017 the av­er­age in­ter­est rate on easy-ac­cess sav­ings ac­counts has only in­creased by 0.07 per­cent­age points.

That’s just 70p for ev­ery £1,000 you have saved, and is far from the 0.25 per­cent­age point hike from the Bank of Eng­land. What’s more, half of sav­ings ac­counts didn’t see any in­crease in in­ter­est.

How­ever, it’s likely that the best-buy ac­counts – so those of­fer­ing the high­est rates – will see an in­crease in rates. It means that savvy savers who are will­ing to ded­i­cate a bit of time to hunt­ing for the best deal can now find bet­ter deals.

The best-pay­ing ac­counts

are likely to be from newer providers, which are of­ten run on­line only or via apps, rather than from the well-known high­street name banks.

The best way to find the top pay­ing cash ISA ac­counts, or sav­ings ac­counts is to go to web­sites such as Money­facts. co.uk or Sav­ingsCham­pion.co.uk, which pub­lish the top-pay­ing ac­counts.

WHAT ABOUT MORT­GAGE HOLD­ERS?

The im­pact on those with mort­gages de­pends on the type of mort­gage that you’re are on. There are around 3.5m peo­ple with a vari­able or tracker rate mort­gage, and they will see their in­ter­est rate, and so monthly costs, in­crease im­me­di­ately – on the same day as the hike many peo­ple had al­ready had mes­sages from their mort­gage com­pa­nies warn­ing them their costs would in­crease.

For some­one with a £200,000 mort­gage, the 0.25 per­cent­age point in­crease in in­ter­est rates will cost around £300 ex­tra a year. Mean­while, some­one with a £350,000 mort­gage will see costs in­crease by around £500 a year. You can check based on your per­sonal cir­cum­stances ei­ther by con­tact­ing your mort­gage com­pany, or us­ing a rate rise cal­cu­la­tor here: www.landc. co.uk/cal­cu­la­tors/mort­gagein­ter­est-rate-cal­cu­la­tor/

How­ever, more peo­ple have fixed-rate mort­gages, and they won’t see any in­crease in their costs. These mort­gages have the rate de­ter­mined for a set pe­riod, usu­ally three or five years, re­gard­less of what the Bank of Eng­land does to rates. How­ever, it means that when these home­own­ers’ fixed rate deals end the new deals of­fered to them will likely be more ex­pen­sive.

Some peo­ple at­tempted to get ahead of the in­ter­est rate rise and lock-in a fixed rate deal to avoid pay­ing the higher costs. How­ever, banks and build­ing so­ci­eties are savvy and many had al­ready in­creased their mort­gage rates in an­tic­i­pa­tion of the Bank of Eng­land’s move.

The big­gest change you can make to cut your mort­gage costs is to en­sure that you’re not on your lender’s Stan­dard Vari­able Rate. These are the least com­pet­i­tive rates of­fered by mort­gage com­pa­nies, and is of­ten what you will de­fault onto once a fixed rate deal ends. They are of­ten dra­mat­i­cally higher than other rates on the mar­ket.

WHAT ABOUT OTHER PEO­PLE IN DEBT?

There are a large num­ber of peo­ple in the UK who are in debt, and we are more of a na­tion of bor­row­ers than savers. Re­search from the Of­fice for Na­tional Sta­tis­tics found that in 2017 house­holds on av­er­age spent £900 a year more than they earn – the high­est fig­ure on record.

Thanks to the in­ter­est rate rise, the cost of debt will in­crease, which will hurt those who are al­ready in debt. It means that the rates on loans, credit cards and other credit will in­crease.

Banks and build­ing so­ci­eties are savvy and many had al­ready in­creased their mort­gage rates in an­tic­i­pa­tion of the Bank of Eng­land’s move

In­fla­tion has been above the Bank of Eng­land’s 2% tar­get for a long time

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