As expected, the Bank of England announced the biggest interest rate rise for three decades last Thursday.
The Bank’s Monetary Policy Committee voted to increase rates by 0.75 basis points to 3%.
It was not only the eighth consecutive rate rise, it was the largest since the Black Wednesday crisis of 1992.
At Continuum we are looking at why it was necessary, how it will impact your financial plans – and whether there might be some silver linings.
Why is the bank doing this?
The Bank of England has several tasks. Keeping the economy running is one. Regulating the supply of money to control inflation is another.
Covid brought the economy to a halt, and the bank dropped its interbank lending rate (usually referred to as the Bank Rate) to stimulate people and businesses to spend.
But as we are all painfully aware, the consequence was inflation. When money is easy to borrow, people are keen to spend it. The price of houses, energy and even food has shot up as inflation nears 11% rather than the 2% the bank aims at.
The bank has put interest rates back up to throttle back spending and borrowing to control inflation.
What will the impact be on you?
The years of low interest may now be over, and the return to normality will be painful – particularly as the Bank of England has admitted that we will be in a long recession as the economy recovers.
There are four main impacts – but some may have a silver lining.
The impact for home buyers
Low interest rates have fed house price inflation. An increase in bank rate will mean an increase in the cost of monthly mortgage repayments. It may bring house price inflation to an end, and force over-inflated prices back down.
But it will certainly mean pain for home buyers.
Those on variable rate and tracker mortgages will see their monthly payments soar immediately. Those with a fixed rate will be enjoy a temporary reprieve, but almost two million homeowners will be hit next year as their fixed deals come to an end.
The silver lining? The markets have already priced in increases – and expected rates higher than the Bank is now indicating. There is a possibility that some lenders will reduce what they charge. Contact us at Continuum and we’ll look to getting you the best rate deal, whether you are buying or remortgaging.
The impact for property investors
Buy-to-Let landlords are already being squeezed by extra costs and tax burdens.
An increase in the cost of a Buy-to-Let mortgage could be the last straw.
The silver lining? There may be scope to make Buy to Let profitable by setting up a limited company. At Continuum we can discuss the possibilities and find the most suitable finance for your property portfolio.
The impact on savers
Savers are winners when rates increase. Rates have crept up this year, and there should be another boost after the latest rise.
Two notes of caution. Do not expect a sudden jump in returns. Better interest offers from banks and building societies will take time to work through the system. And interest rates on offer may still not be equal to inflation.
The impact on investors
Higher interest rate has an adverse effect on some market sectors. Investing in fast-growing companies fuelled by debt is a popular strategy. When interest rates rise, those businesses face higher cost for borrowing and scope for profits falls. Stock prices can fall with it.
The silver lining. A temporary downturn in the market could help savvy investors secure stock at reduced cost – while rebalancing a portfolio away from affected sectors could minimise falls. Contact us at Continuum to discuss your investment strategy.
What should you do?
The interest rate hike will be bad news for many people. The good news is that at Continuum we can help find any silver linings – or at least help you cope with extra costs.
Call us today for the solution you need.
Your home or property may be repossessed if you do not keep up repayments on your mortgage.
The value of an investment is not guaranteed investors capital is at risk.
Equity investments do not afford the same capital security as deposit accounts.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation on a specific financial strategy, you should seek independent financial advice before embarking on any course of action.