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What does an interest rate rise mean for me?

The Bank of England has increased the base rate from 0.25% to 0.5%. This follows a rise from 0.1% to 0.25% in December — the first time since 2004 that the bank has had interest rate rises in two consecutive meetings.

The last increase before December was in August 2018, and the latest increase was only the fifth hike since July 2007.  After a prolonged period of ultra-low interest rates, we spell out how the rate rise impacts critical areas of your finances:

 

Mortgages

 

Anyone on a variable rate mortgage will see their interest rates go up. That includes around 1.1 million UK homeowners on standard variable rates and the 850,000 on tracker loans.

According to data from AJ Bell, someone with a £250,000 variable rate mortgage will pay an extra £384 a year. With higher borrowing of £450,000 the increase in costs is more dramatic, at an extra £684 a year.

The Bank projects that base rate will rise to 1.5% by mid-2023. If this is the case, homeowners with £250,000 of borrowing will have to pay an extra £1,956 a year, compared to the start of the year, while those with £450,000 of borrowing will have to find an extra £3,528 a year, or £294 a month.

The good news is, however, that most homeowners with a mortgage have taken out fixed rate loans which means the news won’t change monthly repayments. The rate rise does, however, deepen the affordability crisis for first-time buyers.

While mortgage rates should remain cheap by historical standards, house prices have soared much faster than earnings meaning that homeownership is still unaffordable for many. The prospect of further interest rate rises later this year and in 2023 coupled with the rising cost of living means would-be homeowners have a much steeper hill to climb.

 

Savings

 

Nothing much will change for savers who will likely see a very small rise in interest rates paid on cash – if they’re lucky. So far only 28 of the 144 savings providers have announced a change to savings accounts following the December base rate increase, according to analysis by Savings Champion.

The average easy access savings rate has only risen by 0.02 per cent since the last base rate rise, from 0.19% to 0.2%, according to Moneyfacts data. Even so, it still pays to look for the highest paying account. With the best easy access deal currently paying 0.71%, it’s still worth moving your money if you’re on one of many accounts paying just 0.01%.

And remember, avoid keeping long-term savings in cash as its value in real terms will start to be eroded by inflation. Consider investing your money for the future.

 

Investments

 

A rate rise had largely been priced in by the financial markets given that inflation was running so high. However, the surprise was the forecast for peak inflation at an eye-watering 7.25% in April. This sent the FTSE 100 and the FTSE 250 reversing earlier gains and heading into negative territory on the day of the announcement.

There will be some direct winners from the rise, however. For example, it spells good news for anyone that hold shares in banks or other financial stocks. Higher rates are good for banks as it means profits made on lending will rise.

Elsewhere, bond yields are rising and therefore prices have fallen. Initial market reaction saw the UK 10-year government bond rise above pre-pandemic levels.

 

Cost of living

 

The act of pushing interest rates up is an economic tactic to suppress inflation.

Yet the bulk of inflation is currently being driven by energy prices which are set internationally – and are also making headlines this week.

A domestic interest rate rise will have very limited impact on the rising cost of gas and electricity for households. Worse still, the Bank’s forecast for peak inflation this year has risen to an eye-watering 7.25% in April, leaving its target of 2% a distant memory.

The cost-of-living crisis rages on for many.

 

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