How will the rise in interest rates affect you?

The Bank of England has announced that it has increased interest rates to 0.25% from the historical low of 0.1% in an attempt to tackle rising inflation in the UK. What will this mean for your mortgage, savings, debt and pension?

How will my mortgage be affected?

The majority of homeowners are on a fixed-rate mortgage. With interest rates at an all time low in recent years, locking in on your mortgage had never been more appealing. Research has found that in the UK, 96% of new mortgages have been taken on fixed rates. In total, 74% of outstanding mortgages are fixed, and if you are one of these borrowers, you will not see any immediate impact from the change.

If you have a variable rate mortgage your lenders rate will directly follow the Bank of England base rate, therefore within the next your payments are likely to increase, and the extra cost will fully reflect the base rate rise. The small print of your mortgage will tell you how quickly the rise will be passed on.

On a standard variable rate mortgage, the implications are slightly trickier and can change at the discretion of your lender. At present, there seems to be no reason for your bank or building society not to pass on the full increase to you, so as with the variable rate mortgage borrowers, you should expect a rise.

As an example, HSBC’s standard variable rate is 3.59%; if it passes on the full rise borrowers paying it will move to a rate of 3.74%. On a £150,000 mortgage arranged over 20 years that will mean monthly repayments go up by £11.66.

Will my savings be affected?

Since the base rate cut last year, savers have been losing out due to most banks paying just 0.01% interest on savings. This increase may be good news for savers, and we would advise you to shop around for the best savings deal available to you.

The change will take a few months to show any major effect on savers who have a variable rate deal, but there is also no guarantee the rate will be passed on in full, or at all. This again, is at the discretion of your bank or building society.

Some providers have already started to increase rates in recent weeks. Last month NS&I increased the interest rate on its Income Bonds by 14 basis points, from 0.01% to 0.15%. The best advice is to shop around.

What about my private pension?

If you have a private pension and want to buy an annuity to provide an income in retirement you could be in for a nice surprise.

Annuity providers invest in government bonds, and these are expensive when rates are low as other investors want to hold them. When rates rise, those other investors are inclined to sell the bonds, which makes them cheaper.

As a result, annuity providers can offer better return on investment. Annuity rates have been steadily rising in recent months and a rise in the interest rate could benefit those who are about to retire.

So, what next?

We understand that for most people, a mortgage is their biggest investment. If you would like to discuss how the rise in interest rates will affect your mortgage, contact us today.

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.

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