What does today's Base Rate hike mean for your money? We asked Sarah Coles, personal finance analyst at Hargreaves Lansdown, to explain.
The Bank of England has today (2 November) announced the first rise in Base Rate since July 2007.
The bank's Monetary Policy Committee has voted to raise Base Rate from its historic low of 0.25% to 0.5% by a majority of 7-2.
Persistently-rising inflation, which now stands at 3%, along with a stronger-than-expected rise in the most recent GDP figures are the biggest factors behind the decision.
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No need to panic
Before we get into the details of what this might mean for your finances, it’s worth providing a bit of context.
As you’re probably aware, 0.5% is the same rate we experienced between 2009 and 2016, so it’s hardly uncharted waters.
What’s more, such is the precarious nature of our economy that it’s highly unlikely (though not impossible) that the Bank of England will follow this up with a series of hikes in the coming months.
The consensus from analysts is that we might see one hike in 2018, two at most.
We’re not about to see a return to a double-digit Base Rate seen in the late 80s and early 90s.
In short: any increase would be noteworthy, but the impact on your finances should be minimal – especially if you take steps to protect yourself.
Mortgage holders
Mortgage holders with variable rate deals will be the biggest losers.
In particular, those on tracker mortgages as these are directly linked to the Bank of England’s Base Rate. That means any increase will be passed on, in full and very quickly, to your monthly mortgage bills.
If you’re on another type of variable mortgage, such as your lender’s Standard Variable Rate (SVR), the rate will inevitably rise but by how much depends on who you bank with.
This is because SVRs are set by the individual banks, which can choose when to increase rates – and by how much.
How much will your repayments rise by?
Obviously, this depends on how much you’ve borrowed, but here’s a typical example.
If you had a £150,000 repayment mortgage with 20 years remaining and a rate of 3%. Should your rate rise to 3.25%, your monthly repayments will rise by just under £19 a month, or around £225 a year.
If, however, we see the unlikely repeated rate hikes, the increases become far more worrying.
Let’s go to the extreme and look at what would happen if your rate jumped over time from 3% to 5%.
In this scenario, your monthly repayments would jump £158, and you’d need to find an extra £1,900 each year.
Ouch.
With Carney talking about more ‘gradual’ rises in future, it may prompt you to consider fixing your rate.
The trouble is that, by the time most borrowers make this decision, lenders have already started pricing rate hikes into their products.
According to Moneyfacts, the average rate on a two-year mortgage has risen from 2.19% in September to 2.27% by 23 October.
Fixed-rate mortgages, however, remain cheap on a historic basis, so if you are keen to have a degree of certainty over mortgage repayments in the near term, and are happy to pay slightly more for this certainty, a fixed-rate is definitely worth considering.
With so much uncertainty on the horizon, longer-term five- and 10-year fixes are looking an attractive option to the risk-averse.
If you choose to stick with a variable rate mortgage, work out how your monthly repayments will change, and how you will factor this into your budget.
While you’re at it, make sure you can afford it if rates keep rising.
As we said they are unlikely to happen in the immediate future, but you will at least have a plan to put into action if rates continue to rise.
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Credit card holders
On loans and credit cards, a 0.25% rise won’t make an enormous difference to monthly repayments.
However, it’s a useful reminder that despite the fact we have had more than a decade of cheap debt, rates can rise, so paying down expensive debts should always be a priority.
Borrowers should also take the opportunity to check they have a competitive rate.
If they are paying over the odds for their borrowing, this is the chance to switch, so that even after the rate rise, you could be paying less interest.
If you are on a fixed deal, or a credit card with a 0% introductory period, bear in mind that, when your deal comes to an end, if you haven’t paid off the debt, the rate you revert to will be higher.
If you don’t have a sensible plan for repaying within the fixed period, this is the time to set up a fool-proof repayment strategy.
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Savers
Savers have been holding out for a rate rise for more than ten years, so will be eagerly awaiting this one.
The bad news is that there’s a reasonable chance many of the high street banks will offer a muted response.
Thanks to quantitative easing and the Term Funding Scheme, they have plenty of capital, so they don’t necessarily need to attract savers with a more competitive rate.
That doesn’t mean savers should resign themselves to disappointing rates.
For starters, Nationwide has already pledged to pass on the rise to most of its savers, while the smaller Newcastle Building Society confirmed it will pass on the rate rise in full to all savers.
And we should see more increases as other banks pass on at least part of the rise.
In fact, they have already started, with some highly-competitive deals hitting the market last week.
Keep your eyes peeled, because the best rates tend to attract so much money that they don’t remain available for long.
Taking a portfolio approach to your savings is also sensible.
This means keeping three to six months’ worth of expenses in a top-paying access account for emergencies and then considering tying up the rest of your savings for the longer term, in return for a higher interest rate.
Retirement plans
If you are about to retire, there are a few ways in which the impending rate rise will affect you.
If you are in a Defined Benefit scheme and are considering transferring out, you can expect the transfer value on offer to fall.
Transferring is a complex issue, which shouldn’t be undertaken without careful consideration and advice, but if you are approaching retirement with high expectations of transfer values, you’ll need to check whether this is still on offer after the rate rise.
On the plus side, if you are planning to buy an annuity with all or part of your pension pot, then a rise in rates will be welcome.
Annuity rates are priced using bond yields.
These tend to rise when interest rates rise, so you are likely to be offered more income for your money. You will still need to shop around, however, as this is likely to get you a better deal for your money.
There’s not an awfully long time before rates are expected to rise and, in many cases, the rise has already been factored in by the markets anyway.
However, it’s not too late for you to take action. If this turns out to be the first in a number of gradual rises, it gives you an opportunity to consider the impact of future increases, and prepare your finances so you can take them on the chin.