Following last year’s Bank of England (BoE) base rate increase, experts predict as many as four more rises over the next two years. Whilst it is thought that any rises will be gradual, that could still lead to an overall increase of 1%.
That might not sound like much, and in the grand scheme of things, it won’t be for the many people who take precautions and protect themselves against it. However, research shows that more than half (57%) of people have no idea what effect further rate rises would have on their finances. (Source: CYBG)
If you’re one of them, you could be headed for trouble.
Two key things happen when interest rates rise:
- Some savers see their returns increase
- Some borrowers have higher repayments
How you are affected depends on the terms of your borrowing or saving, and how far ahead you like to plan your finances.
If you are a saver:
For savers, base rate rises should be good news, as they will potentially push the interest rates up on savings accounts. Unfortunately, many providers are reluctant to pass the rise on to customers straight away; if they pass the full amount on at all.
To prepare for any future rate rises, it is important to remain flexible, for example, if you have a fixed-rate bond coming to maturity, you may decide against locking it away for a further set period until the future of interest rates is clearer.
Start by looking at the accounts you currently have. Compare the interest rate to those available on the market. Look at how your current provider reacted to the last rate rise; if they failed to pass on the benefits the first time, it is unlikely that further increases will reach you.
Use best buy tables such as those we produce ourselves, which can be found here, to find the most competitive savings. Pay particular attention to those rates which have increased since the BoE’s last announcement, as these are more likely to continue to grow in reaction to further announcements.
If you are a borrower:
Home owners have less cause for celebration when base rate rises are announced, especially those who are on variable or tracker rate mortgages.
For fixed-rate mortgage holders, there will be no change to your repayments until the fixed-rate period ends. Depending on your mortgage terms, that could be two, five or 10 years away.
The worst affected will be those whose mortgages have Standard Variable Rates (SVR) or tracker mortgages.
Tracker mortgages use interest rates which are based on an internally-set margin, which is added to the BoE base rate. These interest rates are guaranteed to rise and fall in line with the base rate.
SVR mortgages are set entirely by the provider, but they do tend to follow the ebb and flow of the BoE base rate.
If your mortgage has a fixed-rate period which is due to end within the next year or two, or if you are currently on a (SVR), or tracker mortgage, it may be worth shopping around for an alternative mortgage product to extend the amount of time you have before defaulting to your provider’s SVR. This could shield you from the effects of further base rate rises for as long as possible. It is important to factor in the true cost of switching provider or product, however, as there may be penalties to pay.
How can financial advice help?
Engaging with a financial adviser will give you an insight into how to find the best rates and products to protect your finances from the effects of further base rate increases. This may mean finding a new provider, moving to a fixed-rate mortgage, or investigating different saving account types.
Whatever you choose to do in preparation for the Bank of England’s upcoming announcements, why not let us help? Get in touch with Sarah or Bev on 0115 933 8433.