As you might be aware, the Bank of England (BoE) has raised interest rates five times since December 2021.
These rises in interest rates are an attempt by the BoE to control inflation – in the year to June 2022, the Office for National Statistics (ONS) report that inflation rose to a four decade high of 9.4%.
Rising inflation, and the corresponding rise in interest rates, can have a significant impact on your mortgages and savings accounts.
Read on to learn about how interest rate rises could affect your savings and mortgage, and ways in which you can limit any negative effects.
The impact of rising interest rates on your mortgage
Interest rates are one of the tools the BoE has at its disposal to control inflation. The aim of raising interest rates is to cool demand in the economy by encouraging people to save rather than spend.
As a result, rising interest rates can affect your mortgage, depending on what type you have.
Fixed rate
If your mortgage is on a fixed rate, your payments won’t change during the repayment period.
However, once the fixed-rate period is over, your mortgage will likely move to your lender’s standard variable rate (SVR). As interest rates rise, it’s likely that the interest rates available to you when your deal ends will be higher than before.
Tracker rate
If you have a tracker-rate mortgage, you will see your monthly payments increase each time the BoE increases the base rate. This is because the rate you pay is usually pegged directly to this rate.
Using the Which? mortgage repayment calculator, on a £250,000 repayment mortgage over 25 years, a 0.25% increase in the base rate (from 2.5% to 2.75%) would result in a monthly increase to your repayments of around £32.
Variable rate
If your mortgage is on a discounted variable rate, or your lender’s standard variable rate (SVR), your monthly payments are likely to rise when the base rate does.
This largely depends on whether your lender has passed on the BoE’s base rate rise. Some lenders may absorb the increases for a certain period of time while others will typically raise their SVR in line with base rate rises.
The Guardian recently reported that the average SVR reached 4.91% at the start of June, up by 0.51 percentage points when compared to December 2021. It is now at its highest level since February 2009.
If you have a tracker- or a discounted-rate mortgage, and you don’t have significant early repayment charges for repaying your loan, you could protect yourself against future rate rises by considering a fixed rate. This will ensure your repayments don’t change, irrespective of what happens to interest rates.
The impact of rising interest rates on your savings
After a decade of rock-bottom rates, This is Money report that interest rates on savings accounts are finally rising.
However, even though rates are rising, high inflation means that your cash savings are still likely to be losing value in real terms.
Inflation in the year to June 2022 reached 9.4%. So, goods and services that cost £10,000 a year ago would cost, on average, £10,940 today.
Compare that to the best easy-access savings account. As of 30 June 2022, Moneyfacts reports the best account pays just 1.4%. Had you invested £10,000 a year ago at that rate, you’d have £10,140 now.
You can see that, over the year, your cash would actually have lost value in real terms. Your spending power has decreased, even though savings rates are rising.
As keeping your wealth in cash is likely to see it lose value in real terms over time, investing your cash for the medium to long term – for a period of five years or more – could help you to boost your returns.
Of course, this is not guaranteed, as equities do not offer the same level of capital protection as cash. Cash is deemed secure whereas investment in equities carries risk, meaning the value of your investment can go down as well as up and you may not get back the full amount you invested.
We can help to design a well-diversified portfolio, aligned with your goals, time frame, and attitude to risk.
Get in touch
To discuss how you can get the best return for your savings, or for a general discussion about your finances and plans for the future, please contact us on email info@investmentsense.co.uk or call 0115 933 8433.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
