Interest rates are on the rise. What it means for mortgages and savers.
All eyes are on the next meeting of the Bank of England’s interest rate-setting meeting.
At least, they should be, because it’s looking increasingly likely that the Bank will raise interest rates. And, even if it’s not the next meeting in November, a rise is coming soon, as sure as sure.
A member of the Bank’s rate-setting committee has said as much. Other observers indicate a rise of a quarter of a percent is highly likely.
This might not sound much, and taking the rate to 0.5% will still mean a low base rate. Yet, looked at another way, this will mean the base rate will double, and that will have a big effect.
All this has already sent sterling soaring, up to its highest level since the day after the Brexit vote in June 2016.
That’s good news for anyone taking a late summer holiday.
But what would a rise mean for mortgages and savings?
If you have a mortgage, you’ll be affected - homeowners, that means you.
Even if your rate is fixed, you should be focused on the end of that fix, because a doubling of the base rate will make a big difference to mortgage rates.
If you’re on a variable rate, and millions of people are on base-rate trackers because rates are so low, you’ll pay more immediately.
What increase you’ll pay will depend on several factors, such as the length of the loan, how much you owe and the terms and conditions of your mortgage.
Standard variable rates vary widely, from about 2% above the base rate, to 5%, and even more. The average is about 4.5%.
So, someone owing £150,000 on a repayment mortgage with 20 years of a loan to run, would currently be paying £949 a month. If the rate increases to 4.75%, they would pay £969, a rise of £20 a month.
Of course, once rates start to rise, that is likely to be their general direction for some time. And this is worth bearing in mind.
A rise of a full percentage point to take the all-time-low base rate of 0.25% to 1.25%, would take the repayments on the loan detailed above to £1032 – a rise of £83 a month, almost £1,000 a year.
What’s the best course of action?
The first thing is to do your sums.
Work out what rises of varying amounts would mean for your monthly outgoings and then calculate at what point you would be financially stretched to make those monthly payments?
If you are near your limit anyway, it is worth considering a fixed-rate deal soon. Even if this might be slightly higher than you're currently paying – especially when taking into account the fees that are almost always involved – you will be protected for the length of the fix, if you can afford the fixed-rate payments.
Whether you can get a good fixed-rate deal will depend on your circumstances, especially factors like how long your loan has to run, your earnings, and your loan to value (LTV) – the size of your loan relative to the worth of your property.
One thing is certain, the rates offered on fixed-rate deals will rise in response to a Bank of England rate rise, so acting before a rise is important.
Time to put some money into a savings account?
Savers have been among the biggest losers since interest rates hit rock bottom following the global financial crash.
So, the fact that rates may finally be on the up might offer some cheer for those with some cash to put in the bank or building society.
Right now, savings rates are pitiful. Anyone would do well just to keep up with inflation, let alone beat it.
This means that, most of the time, putting money in a savings account will actually devalue your money.
There are some deals out there, though, if you're prepared to tie up your money for a lengthy period.
But few of the rates available are exactly eye-watering. However, before you dump the idea of savings all together...
Will savings rates go up?
A bit… probably.
Millions are going to be disappointed, though. Savings rates have such a long way to go to beat inflation, they are unlikely to get to that level anytime soon.
The influential RCI Bank’s recent Savings 2025 report forecasts savings rates will underperform people’s expectations by a wide margin.
“The average savings interest rate is forecast to increase by 1% by 2025, up to an average rate of 2.3%. Stand this next to the forecast Bank of England base rate rise of 2% by 2025 (which will start creeping up from 2017) and it’s clear that savings rates aren’t going to increase in line with base rate, challenging the long-held mindset of UK savers.”
But it’s worth bearing in mind three things about cash savings that can still make them attractive:
1) They’re rock-solid safe, if you pick a bank or building society that’s covered by the Financial Services Compensation Scheme. Anything up to £75,000 of your money is protected if the bank goes bust. And this amount is per person, so if you have a joint account, you’ll have £150,000 worth of protection. Remember, though, the total is per bank, not per account.
2) The money is usually easy to get at. Cash – that’s not locked away in a no-access bond – is easy to get at in an emergency. Even if it’s in a notice-period savings account, you’ll only lose interest on what you withdraw. That compares pretty well with other assets, even shares, which can take longer to cash in, especially if they are invested through funds. Other assets, like property, are obviously much harder to make liquid.
3) They’re tax free! One of the good – and last – things George Osbourne did as Chancellor was to lift the amount of interest that can be earned per year before tax needs to be paid. For basic rate tax payers, the cap is now £1,000. If you’re earning 2% (not especially likely), you’d need £50,000 stashed away before you reached that £1,000 of interest. Plus, there is always the option of using a cash ISA. You can put away up to £20,000 a year, every year, and you'll pay no tax on the interest for as many years as you like. The only problem here – ISA interest rates are often even more miserable than normal savings accounts.
With savings, whatever your preference, and interest rate rise or not, the absolute golden rule is: shop around.
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