Dealing with the rate rise

rate riseThe Bank of England Base Rate finally rose yesterday, for the first time in 10 years.

In fact, it has only gone back to the previous record low of 0.5%, where it was last August. But the rise still comes as a shock to those who have only ever really known rates to fall.

We look at the reasons why – and the differences the rise will make.

The rise was expected

Governor of the Bank of England Mark Carney had hinted that the rise was coming several times. Last month, he said that he expected rates to increase “in the relatively near term”. The Monetary Policy Committee (MPC) had shown mounting signs of concern about inflation for months. With inflation now running at 3%, even its most cautious member had no choice but to vote for a rise in an attempt to get the demon of inflation back under control.

Those who had feared that a rate rise would choke off the economic recovery had little scope for further argument. New economic figures showed the UK economy had higher than expected growth in the three months to September, with gross domestic product (GDP) of 0.4%.

The markets had been expecting a rise, and priced it in to their calculations. The pound surged on the rumours alone, and may do even more now that they have been proved true. But what does it mean for the rest of us?

Homeowners will be paying more

Anyone with a 25 year £250,000 repayment tracker mortgage paying 2% interest could see their monthly £1,100 repayment rise by around £30. Of course, the number of people actually on tracker mortgages has fallen. People have been remortgaging to take advantage of fixed-rate deals. Almost 90% of new loans are fixed rate.

For those who didn’t take a fixed rate, it may still be possible to save by switching to a better deal. But you will need to do more than simply check the comparison sites. There are other costs to consider, and a low rate might hide high real costs. Getting some help from the Continuum mortgage experts could be the best way to find the best deal.

But will savers earn more?

A rate rise should be good news for savers. In practice, although most variable savings accounts are linked to the Bank Rate, providers usually fail to pass increases on. Many will wait for months, until market pressures make it impossible for them to keep the increased profits to themselves any longer.

The banks are flush with cash at present, thanks to quantitative easing and the Bank of England’s term funding scheme.  They will have no need to lift savings rates to attract cash.  But watch the market. Some of the smaller savings providers will be ready to compete for your money.

What about borrowers?

According to the analyst Moneyfacts Interest rates on credit cards are already at a 10 year high. Rates are variable, and could increase further. Shopping around if your card provider makes a hike in your rate could save you money, and it might make sense to find a 0% balance transfer card if you do not already have one.

Lending such as personal loans usually offer fixed rates, and will not be affected by the rise in base rate – although the cost of new loans can be expected to head upwards. With concerns about consumer credit getting out of hand, this is one of the reasons why the MPC made its decision.

Will investors be affected by a rate rise?

The rate rise will have a variety of effects on investments. A higher interest rate normally means a decline in the price of government and corporate bonds, although the effect of such a small rise may not be pronounced.

Financial stocks such as banks benefit from higher margins when interest rates go up, so their share prices could be expected to rise.

The pound may be boosted on foreign exchange markets, making overseas investment a little more attractive.

Overall, it may be time to look at your portfolio, and ensure that your mix of investments can still provide the returns you need.

What can you do?

The increase in bank rate is a gentle one, and we are still along way from the historic average of 5%. However, if you have worries about the impact of the increase on your financial arrangements, or want to discuss ways to use it to your advantage, we will be delighted to help.

Simply call us at Continuum.

Investments do carry a degree of risk and the value of your investments can go down as well as up and you may not get back the amount invested.

Remember your home may be at risk if you do not keep up with the repayments for a loan or mortgage secured on your property.

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