Going up? How does the interest rate rise affect consumers

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It’s been over ten years since the last interest rate rise. The Bank of England’s move to increase the Base Rate by 0.25% to 0.5% marks the first of three expected rises in the next couple of years. Higher than desired price rises, together with strong employment data, were behind the decision. There are winners and losers of any rate movement. Here’s how the recent change will affect your finances:

Savers

Finally long-suffering savers will see a boost to returns from their bank or building society. While the rate rise is good news, it won’t change a way of life. The average easy access account pays just 0.39%. A healthy balance of £20,000 that will earn just £78 in a year. Should that average rate rise by 0.25%, savers will receive an extra £50 a year.

History shows that there is a probability that not all providers will increase rates by the full base rate movement for all savers, so things could remain pretty bleak. Your best bet is to keep an eye on rates and move your money to the highest paying account. Millions have money stashed in accounts paying next to nothing. Even if it’s a small balance, make sure it’s earning the maximum amount.

Mortgages

Borrowers are the biggest losers when interest rates rise. Standard variable rates (SVR), on to which a mortgage reverts at the end of a fixed or discounted period, typically move when interest rates do. Before the rate rise, the average SVR was 4.6%. Based on a £150,000 mortgage, monthly repayments will rise by £22 if that SVR rose by 0.25%. It’s a similar story for those on a tracker mortgage. A 0.25% rise to the average tracker rate would mean an extra £18 a month for those with a £150,000 mortgage.

Those looking for a fixed rate mortgage will find rates are creeping up, but there are still some very cheap deals around. It might be worth bagging one sooner rather than later.

Investments

Early indicators from the Bank of England that there was a likelihood of a rate rise means it had already been factored into bond and equity prices. There shouldn’t be a great deal of disruption for stock markets as long as rises are gradual. It’s only steep hikes that could spark a major correction.

The uncertainty that’s brought about by economic change acts to highlight the importance of a balanced portfolio with global exposure in a range of sectors. That means that if one wobbles, your savings won’t take a severe hit.

Pensions

Rising interest rates is good news for those who want to buy an annuity – an income for life. The interest rate rise, with potentially more to come over the next months and years, should eventually send bond yields up and their prices down.

Rising yields should help people trying to get higher annuity rates from insurance companies, which will get a better income stream from government bonds in future. It still means that shopping around for an annuity is vital to achieve the highest income in exchange for your savings.

Personal loans and credit cards

The Bank of England’s decision will make taking out personal loans slightly more expensive. The average interest rate on borrowing £5,000 has dropped to 8% from 9.3% at the time of the EU referendum. This was thanks to the cut in interest rates in August 2016. Now the base rate has increased to 0.5%, unsecured borrowing costs are likely to rise again.

Borrowing on credit cards could also become even more expensive. The average interest rate on credit cards has risen pretty consistently over the past 11 years, rising from 15.9% in 2006 to 23% now, according to Moneyfacts. If you have credit card debt — choose a card with the lowest rate possible — preferably a 0% balance transfer card.

Photo by Aaron Burden on Unsplash