What the interest rate rise will mean for you
As rates go up for the first time in TEN YEARS, our award-winning team analyse all the ups and downs
IT IS the first increase in base rate for ten years. For many homeowners, it will be the first time their payments have ever increased. For savers it will be welcome news although there is no guarantee their rates will improve given the frugality of financial institutions.
In this special three-page report, we look at how you can survive and thrive financially in a world of 0.5 per cent base rate – and maybe get a bit angry in the process.
MORTGAGE BORROWERS
AN INCREASE in the Bank of England’s base rate is bad news for homeowners with loans where the interest rate is variable.
Some 40 per cent of homeowners have variable rate or tracker mortgages which mimic any movement in base rate.
Although it is early days, most lenders are expected to push up variable loan rates by the full 0.25 percentage points – thereby enabling them (but not forcing them) to pass on the full benefit of the rate rise to savers.
Nationwide Building Society, Lloyds Banking Group, Metro Bank and TSB Bank were among the first to pass on the increase to borrowers with variable rate loans. The higher rates kick in from December.
For someone with a £100,000 repayment loan on an average standard variable rate of 4.5 per cent, they will be making monthly payments of just under £556. Assuming this now rises to 4.75 per cent, the monthly payment will increase by £14 to £570.
Of course, with a standard variable rate mortgage, the lender can do as they please. It means they could increase the rate they charge by more than 0.25 percentage points – or choose to leave it as it is (as building societies Newcastle and Skipton have done).
They can also levy a standard variable rate of their choosing, a fact reflected by the range in rates before last week’s move by the Bank of England – from 2.95 per cent (Stafford Railway Building Society) to 5.99 per cent (Newcastle Building Society).
The power lenders have over standard variable rate borrowers is evident by Yorkshire Building Society’s response to Thursday’s rate hike. It runs a number of mortgage brands – Accord, Chelsea, Norwich & Peterborough and Yorkshire.
Previously, Accord variable rate mortgages, available via brokers, were priced at a premium to the other brands – 5.34 per cent compared to 4.74 per cent. After last Thursday’s rate rise, the standard variable rates have all been brought into line at 4.99 per cent, meaning a rate cut for Accord borrowers. For those paying a variable rate, their ability to shield themselves from interest rate rises – by opting for an alternative fixed rate loan – depends on the terms of their mortgage. Some may be prevented from doing so because of onerous penalties that apply on escaping early from a special discounted rate. But if they are close to the end of this deal, they can book a fixed rate option in advance (typically three months).
Simon and Helen Betts remortgaged on to a cheaper fixed-rate deal last week to beat rising interest rates and future-proof their household budget.
After the first rise in the base rate for a decade, Simon, 48, says: ‘We made the right decision. I am relieved we arranged a fixed-rate mortgage.’
Simon and Helen, also 48, live in a three-bedroom semi-detached house in Leicestershire and have three adult children as well as an 11-year-old to look after.
They fixed their home loan for five years at 2.14 per cent with Nationwide Building Society.
Although their previous rate was flexible, allowing unlimited overpayments, it was more expensive at 2.25 per cent and variable – meaning they were vulnerable to a sudden rise in payments if rates increased.
‘Rumblings of a rate rise prompted us to fix our mortgage deal,’ adds Simon. ‘It gives us added security and makes it easier for us to manage our outgoings in the long term.’
Although prices for new fixedrate loans had already risen in response to the base rate increase, a five- year fix can still be obtained at a rate close to two per cent.
David Hollingworth, of broker London & Country, based in Bath, Somerset, says: ‘Fixed rates remain extremely competitive and could
save borrowers a fortune as well as protecting against any further rises to come.’
He says that 90 per cent of customers are currently opting for a fix. In general terms, the more equity you have in your home, the better the deal you will be able to strike with a lender. The longer the fix you opt for, the higher the rate is likely to be.
Shopping around for the keenest priced fixed-rate loan will result in the best deal. But for some borrowers, it may be simpler to lock into any fixed-rate loan offered by their existing lender as their current deal nears its end. This is because the remortgage process will be less onerous – it can probably be done online – a result of your existing lender being familiar with your financial circumstances.
In choosing a fixed-rate loan, do factor in any arrangement costs. Some lenders offer competitive interest rates but charge near four-figure setting-up fees.
For those already enjoying the protection of a fixed-rate loan, Hollingworth recommends that they consider whether they can make mortgage overpayments.
He says: ‘In overpaying, they can reduce their mortgage debt while their interest rate is fixed. It means they will then be better prepared for the time when their fix ends.’
SAVERS
THURSDAY’S base rate rise should be good news for cashsavers after a decade of suffering a wave of interest cuts.
But predictably, most banks and building societies have yet to pass on the 0.25 percentage point increase to savers in variable paying accounts.
Although Skipton Building Society is passing on the full increase to customers with variable savings accounts, it will not do so until early December. Yorkshire Building Society has adopted a similar policy. TSB Bank is only increasing savings rates by 0.15 percentage points although it says this atones in full for the cut savers received when the base rate fell in the aftermath of the Brexit vote in the late summer of 2016.
Others such as Lloyds Banking Group have yet to reveal their hand despite announcing an increase in their mortgage loan rates. Such procrastination means millions of savers will still continue to earn miserable rates of interest on their cash balances. Brands HSBC, NatWest, Royal Bank of Scotland, Santander and Ulster Bank continue to pay 0.01 per cent on at least one of their savings accounts.
Anna Bowes, director at rate scrutineer Savings Champion, says savers should use the base rate hike to hunt down the most competitive accounts. She adds: ‘With savings rates from the high street providers paying as little as 0.01 per cent, it is time for savers to vote with their feet.’
Bowes recommends savers look at high interest-paying current accounts offered by the likes of Nationwide Building Society, Tesco Bank and TSB Bank.
She also says savers should contemplate being brave by looking at less well known household names which tend to pay keener interest rates to attract new business. These include Charter Savings Bank and Vanquis Bank. The key, she adds, is to ensure the provider’s accounts are covered by the Financial Services Compensation Scheme, protecting savers’ cash balances up to £85,000.
RETIREES
PURCHASING an annuity – a stream of guaranteed lifetime income – with the proceeds from a pension fund is no longer a preferred option among retirees.
This is a result of low interest rates and gilt yields (key determinants in how annuities are priced), rising longevity (making annuities more expensive) and new pension freedom rules which mean there are other ways to draw an income from a pension.
But the base rate rise may now make annuities a little more popular. Higher interest rates tend to feed through to more attractive annuity rates.
Billy Burrows, retirement director at adviser Better Retirement Group, remains a big fan of pension annuities. He says: ‘They get a bad press but they are the only policy that insures your income will continue until you die, no matter how long that is.’
He says that someone buying a joint life annuity with £100,000 from a pension could currently expect an annual income of £4,468. If the base rate rise pushes up gilt
yields as expected someone buying over the next two to three months could get anything between £4,577 and £4,647. This assumes a two-thirds pension for the surviving spouse and level income throughout the life of the annuity.
Anyone buying an annuity must ensure they buy an appropriate policy – one that provides protection for a spouse and factors in any health issues. The poorer your health, the more attractive annuity you should be able to lock into. CREDIT CARD HOLDERS THE interest rate rise was necessary to dampen rising inflation – currently 3 per cent – that is putting a tight squeeze on the nation’s collective finances.
It was also designed to put a brake on excessive consumer borrowing.
Householders have been spending madly on their plastic as pinched incomes and higher prices have forced them to put more purchases on the never-never. But they are also more confident – employment is high, even if pay rises are small. Debt accruing on cards has risen by 5 per cent a year to £69billion in August – about £2,500 per household. The danger for borrowers is the average card rate is currently an eye-watering 23.2 per cent – and has risen dramatically over the past few years. The rate hike could see this rate jump even higher.
Research by the Money Charity says it would take more than 26 years to pay off £2,500 of debt at average card rates if cardholders met only their minimum repayment each month.
To beat the pain of sky-high rates, cardholders with strong credit records should apply for a low – or zero – interest card. The market is competitive and there are dozens of cards available for both transferred balances and for purchases – or a combination of the two.
The interest-free period on some deals extends for as long as three years, enough to protect borrowers from a multitude of rate rises. But cardholders should ensure they pay off any balance by the deadline or else they will start paying steep rates and wipe out the benefits of their interest-free ride.
Be aware that many balance transfer cards often apply a high interest rate for any new spending – so consider using one card for managing the balance and a separate low-cost card when hitting the shops.
Financial scrutineer Moneyfacts suggests Tesco, Nuba and MBNA offer among the best for balance transfers, while Sainsbury’s, Halifax Online and Post Office Money are among the best for zero-interest purchase cards. For combined deals consider MBNA, Sainsbury’s, Post Office and Santander. HOLIDAY MAKERS ONE BIG surprise post the rate rise was the pound’s plunge which immediately pushed up the cost of travel money to popular destinations such as the US and Europe.
This meant someone buying £500 worth of euros or dollars on Thursday afternoon got nine euros or seven dollars less than the day before.
Rising interest rates usually act as a boost to sterling, but the Bank of England’s hint that rates might not need to rise fast and furiously – to protect the economy from Brexit – had the opposite effect.
Travellers to Europe are still better off than in August – getting 20 euros more for their money – and those who are US-bound significantly better off than in January, bagging 54 more dollars for £500. Ian StraffordTaylor, at currency exchange firm FairFX, says: ‘Sterling is not at the lowest it has reached by any means so people looking forward to winter holidays or planning a big purchase abroad should not be disheartened.
‘Back in August, holidaymakers leaving it to the last minute before the summer Bank Holiday getaway were left short-changed after the pound fell to a new low of 1.08 against the euro. People should never put off buying currency if they want to get the most from their cash. With further uncertainty expected, some are already locking into the current rate ahead of their Christmas break.’
Meanwhile, travellers should take other precautions – too often travellers fail to plan ahead and end up exchanging their currency at the airport, falling victim to hefty charges.