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How will this month’s interest rate rise affect your finances?

The Bank of England raised interest rates at the beginning on this month – how will this affect your finances?

This article is for information only and no recommendation is being made or should be construed from the contents of the article. Always seek independent financial advice prior to taking any action.

 The Bank of England (BoE) has increased the base rate to 0.5%. This is a 0.25% increase and is the first time the rate has gone up since July 2007.

Banks are not obliged to follow Bank of England interest rate decisions, but they can influence the cost of borrowing, or how much interest you earn on savings so although this recent change is small, it could have an immediate impact on your household finances.

While the decision brings higher costs for those with mortgages and other borrowings, it is positive news for savers, pensioners and some investors. We have looked at the impacts in further detail.

What will happen to mortgages?

The impact of this rate increase depends on what kind of mortgage you are on. If you have a fixed rate mortgage, then there will be no immediate change, however, when you reach the end of your current deal the rates on offer may be higher than you’re paying now.

If you’re on a variable rate tracker mortgage, which follows the BoE base rate, you will see increases straight away. Standard variable rate mortgage holders will probably also see an increase, but this is decided by the lender.

On a positive note, the scale of the rise should not push borrowers beyond the limits of affordability as a quarter-point rise on a 25-year mortgage of, for example, £200,000 at a standard variable rate of 4.5 per cent only means an extra payment of about £300 a year.

There are still good deals available with low rates for those who are looking to re-mortgage. At Prosperity IFA we have access to some of the best rates in the market.

What about Savings – will my rate increase?

In theory, a rate rise should be great news for savers. However, banks may be slow to pass on the benefits to their customers through a raise in savings rates so other investment options such as ISAs are still the better option for your spare cash.

Will the rate rise have an impact on my Pension?

The interest rate rise is good news if you are on the verge of retirement and looking to secure an income through an annuity as these rates are linked to interest rates – and the rise is likely to feed through to higher income for pensioners.

Experts are keen to see whether this rise in annuity income encourages more retirees to consider the merits of an annuity rather than just opting for drawdown.

What about Investments?

The markets will have already priced in the rate rise decision, so it is expected that there will be little impact on stock prices in the short term. Financial experts are more concerned about the negative repercussions of the ongoing Brexit negotiations and uncertainty on the investment market.

Will there be another rise soon?

This month’s interest rate rise was widely expected so was no great surprise. And it is impossible to predict with certainty as to whether the BoE will raise interest rates again any time soon, but one indication could be that because the Bank of England is forecasting inflation to fall below 3 per cent, many believe that a series of rises next year is unlikely.

How can we help?

As fully qualified financial advisors we are always happy to review your current financial arrangements and make sure your money is working hard for you.

If you would like to talk to one of our expert Advisors, call us on 01892 300303, or for more information on how we can help you, visit our website


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