Protect your finances (and profit) from a higher rate

Families have been hit with costlier mortgages and soaring inflation, just as the cost of living crisis bites. Here’s what to do now

Ashock rise to interest rates in the face of soaring inflation has left families scrambling to protect their incomes from costlier mortgages and rising prices.

The Bank of England increased interest rates on Thursday to 0.25pc, up from a record low of 0.1pc, after inflation broke through 5pc for the first time in a decade.

Advisers have urged families to capitalise on low mortgage deals now while they still can and invest their cash to preserve the buying power of their money, as tax rises and surging energy costs threaten to squeeze incomes even more next year.

Millions of borrowers who have variable rate mortgages will be hit with an immediate increase in their monthly payments. There are 2.2 million people on variable rate mortgages, which go up or down at the discretion of the lender. This includes 1.1 million borrowers on standard variable rates, which are typically expensive, and 850,000 homeowners on trackers, which automatically follow the movement of Bank of England’s rate by a certain margin. Though the Bank Rate is still historically low, analysts expect two further rises next year, meaning prudent homeowners should fix now.

Yorkshire Building Society offers a leading two-year fixed rate mortgage at 1.28pc, plus £1,495 in fees. For a buyer purchasing an average £268,000 home with an 80pc mortgage, the monthly costs would be £835.

Furness Building Society has a twoyear fix with lower fees of £749 and a higher 1.33pc rate, which works out at monthly costs of £840.

YBS also offers the best five- year fixed- rate deal, which charges 1.61pc plus £1,495 in fees.

Savers should move their cash into accounts paying the best rate to offset some of the damage caused by the rising cost of living. The rates on offer from most high-street banks are uncompetitive, some as low as 0.01pc on easy-access deals, but the average rate across all banks is 0.19pc.

If banks pass on the 0.15 percentage point rate rise, £10,000 deposited in the average account would earn £33 more in interest than high street accounts over a year.

The best easy-access savings account currently available is from Cynergy Bank, paying 0.7pc, although better deals should emerge as rate rises are factored in. The best one-year bond, from Gatehouse Bank, pays 1.41pc. Savers locking in for five years can earn 2.1pc interest from QIB. However, no savings deal today pays more than inflation. Those looking to save their money for longer – and even profit from the rate rise – may benefit from the typically higher returns of stock markets.

David Henry, of wealth manager Quilter Cheviot, said bank shares would benefit from higher rates. “Higher interest rates mean that banks’ profit margins will improve,” he said. “The difference between what banks are able to earn from loans and what they pay out on products like savings accounts increases as interest rates rise.”

Mr Henry chose Barclays as his pick of the banks listed on the London market and said its shares were good value.

Will Walker-Arnott, of the wealth manager Charles Stanley, and Susannah Streeter, of broker Hargreaves Lansdown, both tipped rival Lloyds.

Ms Streeter said investors should also consider buying shares in companies with high levels of cash reserves, as they would be insulated from a rise in borrowing costs. She pointed to InterContinental Hotels, which has a strong cash position despite the impact of lockdowns on its business. It had £724m of cash in its last half-year results.

“Despite huge disruption to the travel industry during the pandemic, InterContinental Hotels has stayed impressively in the black and has retained cash,” she said.

For more investing ideas in the face of higher rates and rising inflation, see Questor’s Wealth Preserver Portfolio (telegraph.co.uk/questor).