The Bank of England (BoE) has increased interest rates above 0.5% for the first time since 2009.
Today, the Monetary Policy Committee (MPC) voted unanimously to push up the base rate by 0.25% to 0.75%.
That’s not a massive increase; savers aren’t going to suddenly start seeing real returns on most of their bank or building society accounts and it won’t cause significant pain to most mortgage holders.
However, coupled with the 0.25% increase in November last year, it is another warning shot that interest rates aren’t going to stay at record lows forever and that those with debt should prepare for further increases.
So, how will today’s rise affect you?
If you are a saver…
You will hopefully see the increase passed on in the form of higher interest rates.
Nevertheless, it’s probably too soon to get over excited. With inflation (as measured by the Consumer Prices Index) currently at 2.3%, you would currently have to tie up your savings for at least five years to get a ‘real’, above-inflation return. However, tying up capital for that amount of time isn’t without risk and is something to think carefully about doing, before making a commitment.
However, we expect savers will welcome any increase in interest rates with a small cheer, even if they aren’t breaking out the bunting just yet!
If you are a borrower…
How you’re affected by a base rate rise will depend on how you are borrowing money.
If you have a tracker mortgage, where the interest rate is pegged to the BoE base rate you can expect your monthly mortgage payment to rise almost immediately. The same is almost certainly true if your mortgage is arranged on your lender’s Standard Variable Rate (SVR). If you have a fixed-rate mortgage, you won’t see any immediate change to your monthly payments, because as the name implies, your interest rate is fixed and won’t change for the duration of the product you selected when you took the mortgage out. However, the pain may only be delayed until your fixed rate ends, at which point your payments may rise due to the increase in interest rates which occurred during the period of your fixed rate.
Whether you are immediately affected or won’t be until the end of your fixed rate, all mortgage borrowers should start to prepare for further interest rate rises.
There are three key things to do here:
Check your mortgage deal: Use comparison tools or ask your financial adviser or planner to help you to work out whether you are currently receiving the most competitive rates available on the market. This may mean considering a fixed rate, which will protect you from further interest rate rises for a period.
Review your household expenditure: This will help you to understand whether there are any items you can cut back on to create surplus income which could be allocated to higher mortgage payments should rates rise again. Then, you can begin to benefit from making those cutbacks straight away, potentially using the extra income for your emergency fund.
Build and maintain your emergency fund: If you don’t already have one in place, now is the time to take steps to build up an emergency fund. This could help you to recover as and when further interest rate rises take effect, or, as the name suggests, bail you out in a financial emergency.
Should we expect further rate rises?
The BoE Governor, Mark Carney, signalled that three further rate rises will be needed to avoid the rate of inflation remaining above 2% over the next three years.
The report released following the announcement clarifies this: “The Committee also judges that, were the economy to continue to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2 per cent target at a conventional horizon.
“Any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent.”