The era of low interest rates could soon be over. There is growing expectation that the Bank of England could raise rates as early as next month to fight rising inflation – a move that could impact mortgage repayments, savings rates, and the amount of their debt people can pay off .
Interest rates are at an all-time low of 0.1%, but commentators expect a 0.15% hike in the coming weeks and two more hikes of 0.25% over the next year, bringing lending rates back to 0 levels .75% decline before the pandemic. Last week, Goldman Sachs analysts predicted the bank would raise rates in November, February and May.
“The big problem is that it’s not just that rate hike,” said Sara Williams, debt counselor, activist, and author of the Debt Camel blog. “Any impact this has on your expenses will add to your energy bills and the price of food and gasoline. Increasing your mortgage, which normally sounded manageable, could be more difficult this winter. “
How could a rise in interest rates affect you?
People who have borrowed to buy a home or rescheduled have benefited from the low interest rates in recent years. Should there be a change, it will be the floating rate borrowers – an estimated one in four homeowners – who will feel the immediate effect.
David Hollingworth of L&C Mortgages says a family with a £ 200,000 mortgage over 20 years with a floating rate of 3.59% will pay an additional £ 15 per month if the interest rate increases by 0.15% as expected.
And if it goes up another 0.25% as forecast early next year, they’ll pay an additional £ 25 a month. This would mean the mortgage would cost nearly £ 500 more each year.
While fixed prices are still very competitive, says Hollingworth, some of the lowest deals could go away soon.
“In the past few weeks we’ve seen major lenders like HSBC, NatWest, Barclays, and Nationwide make changes to their firm deals. The more moves we see, the more likely it is that fixed deals below 1% could disappear. Five-year rates below 1% are already on the critical list as the rate hikes prevail, ”he says.
Earlier this month, HSBC increased the interest rate on a two-year fixed deal from 0.84% to 0.89%, while NatWest increased the same product from 0.88% to 0.93%.
Borrowers who want to benefit from the low fixed interest rates still have time. If you’re still tied to a deal, an application for a new product can secure the tariff for up to six months.
“Usually, it’s best to take a long time to fix and fix if you don’t expect to be moving again soon. It will cost more, but remember to take out insurance against future rate hikes, ”Williams says.
Savers could be forgiven for hoping that an increase in interest rates after a lengthy period of low interest rates will finally make them make some money. However, the reality can be more frustrating.
It usually takes banks longer to pass changes in interest rates on to savers than it does to those who owe them money. Laura Suter of investment firm AJ Bell also says banks are unlikely to pass the full increase on.
She adds, however, that while savings rates won’t skyrocket overnight, they should increase gradually. “The best savings rate easily accessible right now is 0.65%, and we should see that rise when rates go up,” she says. “Anyone considering putting their money in a fixed rate account needs to think now about what they think interest rates will do in the near future. This is especially true for anyone thinking of signing up for a long-term solution. Savers should wait to see if there is a rate hike and by how much the fixed rate will rise before committing. “
Savings Champion’s Susan Hannums says she expects challenger banks eager to get savers’ money to raise rates, but savers with high street banks are unlikely to see the benefit of that increase. “These savers need to act now and transfer their money to a better paying account to not only improve returns but hopefully benefit from future rate hikes,” she says.
Overdraft rates can go up too, but like savings accounts, it’s unlikely to happen overnight, says Rachel Springall of financial intelligence website Moneyfacts: “Many checking account providers may wait to increase until a big-name brand moves first.”
At a time when other households’ bills are rising, those with debts at high interest rates like credit cards, overdrafts and overdrafts could be hit hard by rate hikes, says Jason Hollands of financial advisor Bestinvest.
“If you can start paying these, the sooner you act the better, and focus on the ones with the highest rates to relieve the pain. If that can’t be done, you may be able to move and consolidate your debt to bring the interest rate down, ”he says.
Should a credit card provider increase the rates, consumers can opt out of the rate hike by stopping using the account: “You can tell the lender that you want to stay with the previous rate and close the account. You don’t have to repay the full amount immediately and it will not affect your creditworthiness as long as you make all repayments on time. ”Citizens Advice says that if a credit card company increases the tariff, consumers should have 60 days to decline it and the balance to be paid at the existing tariff.
The effect of the rate hike depends on how much other debt you have, she says. “When you’re juggling everything to get your payments done, it can feel like you are barely on top of your finances, but if your credit card and overdraft balances are increasing every month, it’s a good idea to speak to a debt counselor and they will go through all of your options. “