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What does an interest rate rise mean for mortgages and savings?

The first interest rate rise in almost a decade could happen as soon as November 2017, the Bank of England has hinted.

Gertjan Vlieghe, a member of the Bank of England's committee that sets the interest rate, argued for an increase in the current rate "as early as in the coming months" in a speech to economists in London.

MORTGAGES

An interest rate rise would mean higher monthly bills for millions of homeowners with variable rate and base rate tracker mortgages.

The cost of any interest rate hike will vary per household. This also depends on the individual terms of a mortgage, how many years the mortgage is taken out for and other factors.

The average standard variable mortgage rate (SVR) in the UK is currently 4.6%, according to financial data provider Moneyfacts. (The Guardian, 15th Sept 2017)

For example, someone on a rate of 4.6%, with a £200,000 outstanding mortgage balance, and 25 years remaining would pay £28.72 a month extra (a payment of £1,151.77. This would have risen from £1,123.05), if the rate rose by 0.25%, assuming it is on a repayment basis.

Although it currently seems unlikely, if there were a succession of interest rate increases, and the rate rose by a total of one percentage point (that is, four separate increases of 0.25%), the extra cost for the example above would stand at £117.10 a month. Over a year this totals to £1,400 a year.

Those with mortgages on a variable rate are advised to have a financial buffer in place. A buffer would allow for homeowners and landlords with a mortgage to cope with such an increase in their payments.

The total number of people on tracker mortgages has fallen in recent years. Nearly 90 percent of new loans, and around 57 percent of all mortgage loans, are currently taken out on a fixed rate basis.  (Independent, 14th Sept 2017)

Generally, taking out a fixed rate mortgage gives the security of only feeling the impact of any rate rise when it is time to re-mortgage.

Some over-extended mortgage borrowers may be unable to cope with an increase in repayment costs, after an initial interest rate rise of 0.25 percent. 

But commercial banks have been pressured not to lend to people unable to withstand even small rate increases and surveys have suggested the vast majority of families would not fall into difficulties.

 

SAVINGS

Savers have suffered years of rock-bottom interest rates, since the base rate was first cut to 0.5% in March 2009.

When looking at the effect of interest rates on instant access savings accounts, the average interest rate has fallen to 0.14 percent a year on balances, down from 0.4 percent in June 2016.  (Independent, 14th Sept 2017)

Rising living costs also hurt the purchasing power of your cash and the Consumer Prices Index measure of inflation increased to 2.9% in May. That is the highest level it has increased to in four years.

According to research by Moneyfacts, not one of the 750 standard savings accounts available on the market can outpace current inflation. (The Telegraph, 30th June 2017)

If interest rates do increase, this will give savers a much better chance of gaining higher returns, which will close the increasing gap on steeper living costs.

Those with variable rate bank accounts should see their savings increase unless their account is specifically linked to the base rate. Although a standard saving provider is under no obligation to increase their interest rates, the majority usually follow suit of the Bank of England.

Savers with fixed rate bank accounts won't see their rates rise, and will have to wait until the end of their account term before they can move to a more rewarding account.

Fixed rate accounts do tend to pay a higher interest rate of interest, more than variable accounts. Savers are rewarded in return for agreeing to lock up cash for that period.

Cash ISA savings accounts have also collapsed in popularity. In the last 12 months, the amount invested in ISA savings accounts has fallen by £20bn. This significant fall is blamed partly on continued low interest rates. (The Guardian, 31st August 2017)

However, the arrival of challenger banks has led to more competition in the fixed-rate savings bonds market.

There are currently five-year bonds on the market paying an interest rate of 2.5%, which is ten times the current base rate set by the Bank of England.

If you are concerned about how a rise in the interest rate would affect you, or your business, and would like to discuss the matter with Ethos, don't hesitate to get in touch with us on 01302 244977.

 

This information is intended to provide a general review of certain topics and its purpose is to inform but not to recommend or support any specific investment or course of action. The tips may not apply, or be suitable, to everyone and you should contact us for advice if you are unsure whether this is the case.

 

Ethos Financial Solutions Ltd are authorised and regulated by the Financial Conduct Authority.

Publish date: 30th October 2017

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