TThe era of low interest rates may soon come to an end. The Bank of England is increasingly expected to hike rates as early as next month to tackle rising inflation – a move that could affect mortgage payments, savings rates and the amount of their debts that people will be able to pay off.
Interest rates are at an all-time low of 0.1%, but commentators expect a 0.15% increase in the coming weeks and two more 0.25% increases next year, reducing borrowing rates to the 0.75% level observed before the pandemic. Goldman Sachs analysts last week predicted the bank would hike rates in November, February and May.
“The big problem is, it’s not just this hike in interest rates alone,” says Sara Williams, debt advisor, activist and blog author of Debt Camel. “Any impact this has on your spending adds to your rising energy bills and rising food and gas prices. So an increase in your mortgage that would normally have seemed manageable could be more difficult this winter. “
So how could a rise in interest rates affect you?
People who borrowed to buy a house or remortgage have benefited from low rates in recent years. In the event of a change, it will be the variable rate borrowers – estimated at one in four homeowners – who will feel the immediate effect.
David Hollingworth of L&C Mortgages says a family with a 20-year mortgage of £ 200,000, with a variable interest rate of 3.59%, will pay an additional £ 15 per month if the rate rises 0.15% , as you would expect. month.
And if it increases again as planned by an additional 0.25% at the start of next year, they will pay an extra £ 25 per month on top of that. That would mean the mortgage would cost almost £ 500 more each year.
While fixed rates are still very competitive, Hollingworth says, some of the lower offers may soon be gone.
“Over the past two weeks, we’ve seen major lenders, including HSBC, NatWest, Barclays and Nationwide, make changes to their fixed agreements. The more moves we see, the more likely it is that fixed trades below 1% could disappear. Five-year rates below 1% are already on the hot list as rate hikes start to kick in, ”he says.
Earlier this month, HSBC raised the rate on a two-year fixed agreement from 0.84% to 0.89%, while NatWest increased the same product from 0.88% to 0.93%.
Borrowers who want to take advantage of low fixed rates still have time. If you’re still tied to a deal, a request for a new product can secure the rate for up to six months.
“It’s normally best to repair and repair for a long time if you don’t plan to move again soon. It will cost more, but think of it as insurance against future interest rate hikes, ”says Williams.
Savers could be forgiven for hoping that a hike in interest rates will finally allow them to make money after a prolonged period of lowest returns. The reality is perhaps more frustrating, however.
Typically, banks take longer to pass rate changes on to savers than to people who owe them money. Laura Suter of investment firm AJ Bell said banks should not pass on the full hike either.
But she adds that while savings rates aren’t going to rise overnight, we should see them gradually starting to rise. “The best easy-to-access savings rate right now is 0.65% and we should see that increase if rates go up,” she said. “Anyone considering putting their money in a fixed rate account now needs to think about what the rates will do in the near future. This is especially the case for anyone considering a long-term fix. Savers may want to wait and see if a rate hike will happen and how much fixed rates will rise before committing.
Susan Hannums of Savings Champion says she expects challenger banks, who are keen to get money from savers, to raise rates, but savers with leading banks are unlikely to benefit. such increases. “These savers need to act now and move their money to a higher paying account not only to improve returns, but hopefully benefit from any future rate hikes,” she says.
Overdraft rates can also increase, but, like with savings accounts, this is unlikely to happen overnight, says Rachel Springall of financial news site Moneyfacts: “Many current account providers can wait to increase until a notable brand moves first.
At a time when other household bills are rising, those with high interest debt such as credit cards, loans and overdrafts could be seriously affected by rate hikes, says Jason Hollands of financial advisers Bestinvest.
“If you can start paying them off, the sooner you act the better, focusing on the ones with the highest rates to reduce the pain. If that’s not an option, then it may be possible to move out and consolidate your debt to lower the interest rate, ”he says.
If a credit card provider increases rates, Williams says consumers can reject the rate hike by stopping use of the account: “You can tell the lender you want to keep the previous rate and close the account. You don’t have to pay off the full balance immediately and it won’t affect your credit score, as long as you make all repayments on time. Citizens Advice says that if a credit card company increases the rate, consumers should have 60 days to reject it and pay the balance at the current rate.
The effect of the rate hike will depend on the amount of your other debt, she says. “If you’re juggling everything to try and make your payments, you might feel like you’re pretty much on top of your finances, but if your credit card and overdraft balances go up every month, it can make you feel like you’re on your way. It’s a good idea to speak to a debt counselor and they will look at all of your options.