On 22 September 2022, the Bank of England raised the base rate to 2.25%, continuing the steady increase from the historic low of 0.1% in 2020 and 2021. The move is a response to the sharp increase seen in inflation over the past few months, which hit 10.1% in September 2022.
The reason for this is that raising interest rates is expected to lower inflation, since it encourages more people to save than to spend. In time, this should bring down the price of goods and services, thereby lowering inflation.
With this in mind, how could the interest rate rise affect your own finances, and how can you make sure your wealth is kept safe?
Mortgages
The type of mortgage you have will influence how quickly the interest rate rise affects you.
Fixed-rate mortgages
If you are on a fixed-rate mortgage, the amount you pay each month will remain the same, so you will not be immediately affected by the interest rate rise.
However, any new mortgage deals you take out when your fixed term comes to an end are likely to be more expensive.
If your fixed term is due to end within the next three to six months, start looking for new deals now because you can often lock in a new mortgage deal up to six months in advance. This could help you beat further interest rate rises, which are expected in the near future.
Standard variable rate mortgages
A standard variable rate (SVR) is set by your lender, and the interest rate rise will usually affect the rate charged.
Whether you are on a SVR mortgage or a discounted variable mortgage (usually the lender’s SVR minus a fixed percentage), you will notice an increase in your monthly repayments over the coming weeks, but your lender will write to you to inform you of the exact increase to expect.
If you are on your lender’s SVR, you are permitted to change deals at any time. It is a good idea to see if you could spare yourself these increased rates by doing this, particularly since further interest rate rises are expected in the coming months.
Tracker mortgages
Tracker mortgages are designed to track the base rate, so your monthly repayments will go up almost immediately as a result of the interest rate rise.
In response to the most recent base rate rise, the Times Money Mentor reports: “A typical homeowner with a £400,000 mortgage on a tracker rate will see their monthly payments jump by £99 – or £1,188 a year.”
Unlike SVR mortgages, if you want to switch to a different deal from your tracker mortgage, you may be faced with an early repayment fee. Make sure you read the fine print on your contract before deciding to switch so that you can decide if the fee is worth paying to exit early or if you would be better off waiting until your current term finishes.
Although we do not advise on mortgages, we can refer you to experts who will be happy to help. They will discuss your concerns and requirements and recommend the most suitable steps considering your financial circumstances and long-term plans.
Savings
While interest rate rises are bad news for mortgage customers, if you are a saver, it is usually the opposite. This is because rising interest rates should result in higher savings rates.
However, it is important to consider the increase in interest rates alongside the increase in inflation since the rate on savings accounts is failing to keep up in the current environment.
According to Moneyfacts the highest interest rate on an easy access savings account as of 19 October 2022 is 2.55%. While this has risen in recent weeks, it is some way behind the current rate of 10.1% inflation.
It can pay to speak to a financial planner to establish how much of your wealth should be held in cash and alternative ways to grow your savings.
Pensions
Pension pots will often grow when interest rates rise, particularly where funds are invested in bonds. However, if your pension is invested in the stock market, it is likely that the value of the funds you are invested in will dip as a result of the interest rate rise.
This will affect you differently depending on how close you are to retirement. If you are more than 10 years away from retirement, the impact of the current base rate rise will likely not have a substantial impact on your final pension pot, even if a lot of it is invested in stocks and shares. This is because you have plenty of time for the stock market to recover from this dip.
If you are approaching retirement and are beginning to think about accessing your pension, it might be useful to speak to a financial planner about how best to protect your pension from the impact of current events.
You can read more about how to protect your pension pot during challenging times here.
Borrowing
Existing loans such as car finance will not be affected if you agreed to a fixed rate when you took out the loan.
However, taking out new loans may be more expensive considering the higher interest rates. Read the small print carefully for any new loans taken out and encourage family members, such as children, to do the same.
Investments
If you are the owner of restricted stock units or a member of your company’s sharesave scheme, the interest rate rise and the troubles in the wider economy could also affect you, since stock markets generally react quickly to changes in the base rate. This may have a knock-on effect on the value of your holdings.
As with every type of investment, however, the values will rise and fall in the short term. If you have years until your retirement, there is plenty of time for markets to recover.
Get in touch
If you are concerned about how the recent interest rate rise will affect your finances or want to find out how you can make the most of the options available to you, we are here to help. Email enquiries@bowmorefp.com or call us on 01275 462 469.
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.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pension Regulator.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Bowmore Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority but is not regulated to provide mortgage advice.
