We’re almost half way through 2018, and it’s likely that you’ve already thought ahead about some things. Maybe you’re planning a trip abroad during the summer holidays, or you’re a really eager Halloween costume aficionado (and we won’t mention those who are already thinking about tinsel and stockings!).
But have you thought about interest base rate rises?
They’re not as exciting as holidays and parties, granted, but it is important to act now if you are going to protect your finances from the impact of the predicted increases over the next 12 months.
What’s likely to happen?
According to experts, the Bank of England (BoE) is likely to raise the base rate twice in 2018, with another two increases expected to follow next year (Source: EY ITEM Club). Naturally, all financial predictions should be treated with an amount of scepticism, however, it seems certain that when rate rises do come, they will be gradual in nature.
Nonetheless, borrowers should not underestimate the impact on their personal finances, nor should savers overestimate the benefits of them.
If the predictions made come to fruition, the base rate may increase by as little as 0.25% each time, but that will still be a minimum increase of 1% over the next 24 months. Whilst it might not sound like much (especially if you remember the late 80s and early 90s), it is likely to impact you.
What will an increase mean for you?
There are two sides to the potential effects of base rate rises; the negative impact on borrowers, and the benefits it can bring for savers.
Last year, it was estimated that 3.9 million homeowners had variable, or tracker mortgages (Source: Council of Mortgage Lenders). That means that just over two fifths of homeowners face a rise in monthly repayments every time the base rate is increased.
Variable and tracker rates are, by definition, not fixed. Therefore, when the BoE increases interest rates, this rise is passed on by the mortgage lender to those people with these types of mortgages, pushing up their monthly payments.
If you have a tracker or variable mortgage, the first thing is to understand how much your mortgage payment will increase by if interest rates rise, then ask if you can afford it. If not, it is time to start looking at your options. These include:
- Moving to a fixed rate mortgage
- Cutting back on other expenses to free up the money to cover the increased payments
- Use the time you have to head off any rises and start putting a financial buffer in place which can absorb the extra costs for a while
Fixed rates are usually offered on a fixed-term basis, so it is likely that you will need to shop around every two-to-five years to find a product that suits your needs.
Increases in interest rates are mostly good news for anyone building their savings. Whether it’s to be used as a deposit on your next home, or you are concentrating on making sure that you have enough to live on in retirement, higher interest rates should give you better returns on your savings.
However, it is unlikely that providers will be rushing to pass any rate rises onto their customers, so where you choose to keep your money now, will matter in the long run. That means that you will need to shop around if you are to see the best possible growth in your savings.
It is also important to keep inflation rates in mind. Even though they may show signs of having peaked last year at a post-Brexit-vote high, it is still tough for savers to find a real return on their money and this is unlikely to change anytime soon.
Our three top tips for finding the best saving account are:
- Shop around; using more than one comparison tool
- Consider differ types of account; could locking money away in fixed-growth options be better for you?
- Do your research into how providers reacted to the previous rate rise; if they were reluctant to pass the increase onto savers, they are unlikely to act differently during future rises
Where to go from here
Whether you’re currently borrowing or saving (or, most likely, a mix of both) you will undoubtedly be looking for ways to stay ahead of the potential base rate rises over the next 24 months. The best way to do this is to engage with a financial planner or adviser to develop a strategy and gain insights which will enable your money to work for you and allow you to meet your financial goals.
For more information, or to get started, feel free to get in touch.