Personal Investing
Emma-Lou Montgomery 8 Nov 2017 10:40am

How will an interest rate rise affect you?

It depends on whether you’re a saver or a borrower
Caption: We're facing the first interest rate rise in almost a decade
How will an interest rate rise affect you?

So we’re looking at the first interest rate rise in almost a decade. That’s going to take many younger borrowers in particular into uncharted territory. According to consumer group Which? just under half of mortgage holders have never experienced a rise in interest rates.

For the rest of us it will undoubtedly bring back memories of rate hikes of the past. Although with an expected rate rise of just 0.25%, the highly-anticipated new Bank of England base rate of 0.5% is still a far cry from where it was in 1989, when it got within touching distance of 15%.

Thursday’s expected rate hike does, however, potentially herald the beginning of the end of the ‘lower forever’ interest rate environment that we’ve been living in for so long now. Although if Mark Carney sticks to his word, further base rate rises will continue to be small and happen gradually.

How the rate rise affects you on a day-to-day basis will largely depend on whether you’re a borrower or a saver. And even then, whether you’re on a fixed or variable rate mortgage.

If you’ve got a mortgage...

There’s no doubt that the rate rise will increase the cost of borrowing. And there have already been signs of this happening as many lenders’ fixed rate loans have increased in recent weeks after a rise in swap rates, which lenders use to price their home loans.

While the majority (57%) of borrowers are on fixed-rate deals and so won’t be affected by the base rate hikes as long as their fixed rate lasts, according to the Bank of England, the remaining 43% of homeowners are on variable or tracker rates will see a hike. And probably before Christmas.

According to figures from the Nationwide Building Society, on an average mortgage of £125,000 a 0.25% rate rise would push monthly payments up by £15 to £665. That’s an additional £185 a year.

If you want to borrow money….

If you were planning on borrowing, then be prepared to pay more for the privilege once the base rate starts to rise.

One ‘perk’ for anyone looking to borrow money in the past few years has been the availability of cheap credit. As a result, borrowing on loans, overdrafts, credit cards and car finance has grown rapidly since 2011, peaking in November last year. The annual rate of borrowing on loans, overdrafts, credit cards and car finance remains close to double-digit levels. This is one of the reasons why the Bank of England is keen to dampen down this enthusiasm for cheap borrowing by putting up interest rates.

While anyone already locked into a low rate loan will be unaffected by the rate hike, the cost of borrowing for newcomers will go up. That will be the same whether you want to borrow on a mortgage, a car or on a credit card.

If you have savings…

There’s no doubt that life has been tough for savers since the low interest rate environment took hold. Gone are the days when money in the bank earned interest. Today you’re lucky to get 0.01% on some accounts, so any rise in the base rate will be welcomed by savers who will then be hoping banks and building societies will want to woo them with higher savings rates.

That is all the more likely too from the start of next year when banks and building societies may well need to compete for deposits from savers as their easy ability to borrow money from the Bank of England comes to an end, with the termination of the Funding for Lending and the Term Funding Schemes.

If you’re living on a fixed income…

While a 0.25% rise in the base rate is not going to see a huge hike in returns on savings, for anyone who has struggled to make the most of what they’ve got, a rise in interest rates will be seen as a bright spot on the horizon.

Figures from Moneyfacts show that there is still not a single standard savings account that beats or even matches the current rate of inflation at 3%, meaning that pensioners in particular have increasingly struggled to make their income meet the demands of the daily cost of living. Any opportunity to make your money work harder has got to be a good thing.

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