What you can do to prepare for rate hikes

THE Bank of England has given its biggest indication yet of when interest rates will rise — so what should you do with your nest egg?

Governor Mark carney last week said the Bank base rate could start going up early next year , before slowly rising to about 2.25 pc.

It should bring some relief to savers who have seen rates continue to fall since the base rate hit its record low of 0.5 pc in March 2009.

Recently, the expectations of a rise have caused fixed deals in particular to edge upwards.

Both Halifax and V irgin Money have upped the rate to 2 pc for new savers on their two-year deals on tax - free cash Isas i n the past week.

But tying up your money for two years may mean that you miss out on some better paying accounts ahead. If you take a fixed rate, you won’t be able to get your money out until the term ends.

a better deal could prove the top one-year fixed-rate bond, which pays 1.64 pc after tax (2.06 pc before) from newcomer charter savings Bank.

Or RcI Bank , which has this week hiked what it pays on its easy-access Freedom account to 1.32 pc ( 1.65 pc) f r om 1.2 pc (1.5 pc). all those already in the account will see their rate auto - matically increase.

Danny cox, from independent financial advisers Hargreaves Lansdown, says: ‘savings rates should rise, but we don ’t know by how much or when. y ou could do better to wait a while before you buy a fixed-rate bond, but during that time you’ll lose out on interest in your easy-access account.’

He adds: ‘stick to short-term deals of one or two years. The better option may turn out to be to fix for one year now and then roll your money over at the end of the term for another year.’

Though a rise i n base rate c ould have an i mpact on mortgage repayments, it will be welcomed by savers — who outnumber borrowers.

But don’t expect rates to return to the pre -banki ng crisis l evels of 4 . 5 pc t o 5 . 5 pc. Rather, Mr carney has indicated that 2.25 pc to 2.5 pc might be a more realistic longer - term average.

The reason a rate rise is getting close is both because of the strength of t he economy and because wages are rising . This could cause inflation to rise, so rates will go up to stop it from getting out of hand.

Experts predict rates will climb to no more than 2 pc over the next 18 months, going up very gradually, with the first 0.25 percentage point rise coming in the first six months of next year.

The rate rises could prove a double boost to savers because from next year all basic-rate tax - payers will now be able to earn £1,000 a year tax -free interest; higher-rate taxpayers will be able to earn £500. so not only are rates set to rise, but anyone with a household income of more than £15,000 should get extra interest on their savings.

sadly, it ’s impossible to say precisely which of today’s deals will still look good after rates rise. Much will depend on how banks and building societies react to any base rate increase.

There is no guarantee that they will pass on the increases to sav - ers. and we just don’t know exactly how fast the Bank of England may be tempted to increases rates. If you tie up your money for two years in the top fixed-rate Isa at 2 pc now, you are guar - anteed interest of £ 404 on £ 10,000 over the term. This assumes you l eave t he i nterest i n the account for the full two years. I f you go f or the top one -year cash Isa, at 1.71 pc from V irgin Money , you will see £171 in the first year. If rates rise in line with base rate and go up by 0.5 points by this time next year , you will be able to pick up a one -year deal at 2.21 pc.

But at this rate you will earn slightly less interest — a total of £395 — over the two years, even though you earn a better rate in the second year.

But if savings rates rise faster than base rate, you will lose out on going for the two-year deal.