The Bank of England (BoE) base rate has risen from 0.1%, where it has been since March 2020, to 0.25%. This is the first rise in the base rate for more than three years and is likely to affect interest rates across the financial sector.
The interest rates on some savings accounts and mortgages have already increased, with more changes expected over the next few months. But why has the base rate gone up, and how could the resulting interest rate changes affect you? Read on to find out more.
The base rate is rising to bring inflation under control
The base rate is the rate of interest that the BoE charges other banks or lenders when they borrow money. In turn, this influences the interest rates that individual borrowers pay on their loans, and savers earn from their savings accounts.
The BoE have raised the base rate in a bid to bring inflation under control, which is now at its highest point since the early 1990s, at more than 5%. A high inflation rate means a more expensive cost of living, as it measures the average increase in the cost of goods and services year-on-year.
The theory is that by raising interest rates, the Bank encourages saving and discourages spending and borrowing.
The rise in the base rate to 0.25% could just be the start too, as further increases may be required if inflation continues to rise.
A rise in the base rate could improve the interest on your savings
One benefit to the rise in the base rate, other than to potentially lower inflation in the future, is that the interest on your savings accounts may increase. Interest rates have been at record lows for more than a decade, resulting in a reluctance to save for many people, and a mini boom in DIY investing.
A higher interest rate on your savings accounts means that you will earn more money by keeping your savings with your bank or building society.
However, the interest rates on your savings accounts are not guaranteed to rise alongside the base rate. This is because your provider can choose whether their interest rates move in tandem.
Even if your rates do increase, the likelihood is that they will not make a huge difference to your savings at this stage. That’s because any rate increases now are likely to be minimal, especially as most easy access savings accounts have interest rates below 0.1%.
This is Money report that the average saver with £1,000 in an easy access account would gain a maximum of £1.50 in additional interest a year because of the change. To even get the full £1.50 in this example, it assumes your bank or building society passes on the base rate in full, which may not happen.
The likelihood is that, even after the dust settles, there will still be no savings accounts that pay an interest rate even near to the rate of inflation. So, your cash savings will still lose value in real terms. If interest rates continue to rise, however, it may give you more of an incentive to save with a bank or building society.
Monthly payments will increase for tracker and standard variable rate mortgages
One downside of a base rate increase is the potential for mortgage rates to rise. The rise in the base rate will affect you differently depending on the type of mortgage you have.
For example, if you have a fixed-rate mortgage, you will notice no difference until the end of your term. If you remortgage to another fixed-rate deal at the end of your term, there is a chance that it will be more expensive than your current one, especially if interest rates continue to rise over the next couple of years.
Conversely, if you have a tracker-rate mortgage, you will feel an immediate impact, as your mortgage rate is dependant on the movement of the base rate. Since the base rate only increased by 0.15%, your monthly payments should not change drastically, but this could change if the base rate continues rising.
If you have a variable-rate mortgage, whether or not you experience a change to your rate is entirely down to your provider. Most providers will probably increase their standard variable rate (SVR) alongside the base rate, but that isn’t necessarily guaranteed.
The Guardian gives the example of a 20-year, £150,000 mortgage on HSBC’s SVR of 3.54%. The rise would likely take the rate up to 3.69%, which would increase monthly payments by £11.66.
Get in touch
If you’re unsure about the stability of your finances in the face of rising interest rates and would like some professional advice, please email info@investmentsense.co.uk or call 0115 933 8433.
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