Interest Rate Rise 2017: What Does It Mean For You?

On 2nd November, the Bank of England (BoE) increased its base rate after more than a decade – the first time since July 2007.

Interest rates have been low to help facilitate the country through the financial crisis but official figures illustrate that the UK economy grew faster than expected between July and September. This gave the BoE committee the impetus to vote for a 0.25% increase on the existing 0.25% base rate to try and counteract high levels of inflation.

But how will the increase affect you?

Mortgages

There will be a rise in the cost of mortgages for many people on tracker rates because they follow the BoE base rate.

However, the increase will affect far fewer mortgage borrowers than in previous times, because many people have shied away from tracker mortgages due the uncertainty of today’s economy – in fact, 57% of mortgage loans are fixed-rate. Additionally, the percentage of households with a mortgage in England has dipped below 30 per cent from over 40 per cent ten years ago.

Analysis by the Resolution Foundation shows that only 11% of UK households are immediately affected by the rate rise.

I’m On A Tracker Mortgage. How Much Will My Payments Increase?

The average mortgage in Britain is £175,000 and payments for this level of tracker mortgage will increase by about £22 a month.

I’m On A Fixed Rate Mortgage. Do I Have Anything To Worry About?

Those on a fixed-rate mortgage will not immediately feel the impact of a rate rise. However when they come to remortgage at the end of their fixed-rate, they are likely to find the next deal more expensive.

I Have a Buy-To-Let Mortgage. What Effect Will A Rise Have?

Most landlords will have an interest-only buy-to-let mortgage and will instantly feel the downside to the interest rate increase. For example, on a mortgage of £200,000, a 0.25% increase will result in an extra £40 a month in repayments. The increase in payments for the landlord may have a knock-on-effect on rental amounts.

What’s The Effect On Other Types Of Lending?

The truth is, we just don’t know yet.

The good news for borrowers is that credit card and loan providers are under regulatory pressure to prevent a credit bubble and a sharp rise in defaults. This means that credit providers are less likely than mortgage companies to pass on the rate rise, although this is not certain.

What About House Prices?

It’s too soon to tell if there will be any significant changes in house prices due to the interest rate rise. Interest rate rises do historically knock confidence in the property market but the general consensus is that there won’t be a significant change to house prices at the moment. Although this could change.

How About Prices In The Shops?

The BoE increased the interest rates to counteract rising inflation, but the effects will not be seen in everyday prices for a while. It took six months before the Brexit decision resulted in an increase in the cost of imported goods so perhaps we’ll see prices rise in the shops in a similar timeframe.

However, retailers do worry that long-term, consumers will have less disposable income after paying more for their mortgage and other bills.

How Will The Rise Affect Savings?

So this is the good news. Rises in saving rates should happen, although not immediately. But you need to check whether your bank will pass on this 0.25% rise to its savers. Not all banks have been open about how the rate rise will impact their savers.

In practical terms, someone with savings of £10,000 will see an increase of £25 per year with the new rate of 05%. So don’t go booking that luxury cruise just yet!

Will There Be More Interest Hikes?

If economic growth is kept on track, it’s highly likely that next year will see at least one rise, if not two.  However, the BoE have assured that any future rises would be “gradual and limited”, with forecasters predicting the BoE will be at 1% by the end of 2018.

What Will Happen To Mortgage Repayments Then?

Another 0.5% increase will add £67 a month to the repayment on a £175,000 tracker mortgage. Not great, but not disastrous for most households. However, if the base rate gets to 3%, repayments will increase by a significantly more uncomfortable £260 per month.

What Can I Do

Rates look set to rise further but we can protect ourselves from the effects of further increases

• Curb spending on non-essentials and save as much as possible.
• Exercise caution before taking on additional borrowing – and consider how you’ll cope with increased payments or a decrease in income.
• Look for the cheapest deals for mortgages and any other borrowing you may have now as it’s doubtful that the deals will be this cheap for a while to come.

I’m Worried. Who Can I Talk To?

Combined with high levels of borrowing, increasing living costs and stagnant wage growth, a small rate rise can push some families into financial trouble. It’s understandable that many people are worried about their financial position right now.

If you think you can’t afford your mortgage payments due to the hike (and the possibility of future hikes), the first port of call should be your lender.  Alternatively, for impartial and budgeting advice, contact the Money Advice Service Debt Advice for a chat with an adviser. Note that you don’t have to be in debt to access this service, but advisers can help you budget.

In summary the interest rate hike will impact everyone in some way or another over the next few months. And the prospect of further hikes will delight savers but make families on tight incomes fear the financial worst.

However the BoE is trying to implement these interest rate increases gradually and in a minimal way: at the end of the day, consider it a necessity to stop inflation getting out of control, and start to think about how you will manage your finances as the inevitable increases are put in place.