How the interest rate rise might affect you

Global uncertainty is having a direct effect on our finances in the UK, with prices rising and businesses juggling the pressure of various issues.

The impact of the war in Ukraine has an impact on gasoline prices and the cost of everyday items. The economic uncertainty it creates also makes the Bank of England’s rate decisions more complicated.

The idea of ​​raising interest rates is to keep current and projected price increases, as measured by the rate of inflation, in check. In the face of global turmoil, this can be a relatively blunt tool. All eyes will be on the Bank’s long-term strategy.

For now, the authorities have increased interest rates from 0.5% to 0.75%, the third rate hike in four months.

Higher interest rates make loans more expensive. For households, that could mean higher mortgage costs, although, for the vast majority of homeowners, the impact is not immediate and some will escape altogether.

An improvement in savings rates is likely to be outweighed by a fall in the value of money saved.

The past few years have seen an extraordinary period of cheap mortgages but, even before the Bank of England’s Monetary Policy Committee started raising interest rates in December, there were signs that the era of ultra-low mortgage rates had arrived. to its end.

Some lenders have increased rates for those applying for a new home loan.

However, brokers have predicted that any rise in mortgage rates will be “slow and measured,” meaning mortgages will remain cheap by historical standards for some time.

It’s a little-discussed fact that only about a third of adults have a mortgage.

About a third rent their home, another third have never had a mortgage or paid it off. Those figures come from the English Housing Survey, which is limited geographically but is one of the most comprehensive guides available.

Some 74% of UK mortgage borrowers have fixed-rate arrangements, so they would only see a change in their payments when their current term ends, according to banking trade body UK Finance. About 1.5 million fixed-rate deals will expire this year and another 1.5 million in 2023.

Of the remainder, 850,000 homeowners have follow-on offers and the other 1.1 million have standard variable rates (SVR). They are the people who are likely to feel an immediate impact now that the Bank’s rate has risen.

Increasing the bank rate to 0.75% means that a typical tracker mortgage customer’s monthly payment will increase by £25.76. The typical SVR customer is likely to pay £15.96 more per month, figures from UK Finance show. This is on top of similar increases in previous months.

That means a tighter squeeze on household budgets at a time of rising bills and when people have grown accustomed to years of cheap lending and relatively slow prices.

All mortgage applicants since 2014 would have had to show in a stress test that they can pay at a rate of around 6% or 7%; The idea is that a small rate increase may be uncomfortable, but not unmanageable, for homeowners. However, the Bank of England plans to remove this requirement, with a consultation on the proposal closing in May.

Any improvement in savings rates will have very limited impact on the value of hidden money, as the purchasing power of these funds is being eaten away by inflation.

Analysts warn that there is no guarantee that the Bank’s higher rate will be reflected in better returns on savings.

Savers are often borrowers too, but money in the bank has been losing value for some time.

Anna Bowes of the Savings Champion website says it’s “really disappointing” how slow many providers have been to react to the Bank of England’s base rate increases.

People receive pennies of interest for every £100 they keep in savings for a year. An increase in the bank rate will do little to change that scenario.

The average interest rate for an easy access account you can open today is 0.2%, up from 0.17% in December. For easy access accounts closed to new customers, it is 0.26%, versus 0.22%.

The highest paying easy access account has an interest rate of 0.84%, up from 0.71% in December.

In the last five years, the best easy access savings rate in the market was in September 2019, which paid 1.6%.