What Rising Interest Rates Mean for Your Mortgage, Debt, and Savings | Mortgages

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The Bank of England has raised interest rates to 0.25% from a historic low of 0.1% in an attempt to tackle rising inflation in the UK, but what the hell does this mean to the public?

Will my mortgage go up?

Only if you have a variable rate mortgage – usually a tracker that tracks the base rate, or a standard variable rate loan from a lender. A follow-up mortgage will follow the base rate directly – the fine print on your mortgage will tell you how quickly the hike will be passed on, but next month your payments are likely to rise and the additional cost will fully reflect the hike in the rate. based. On a tracker that currently costs 2.1%, the interest rate will drop to 2.25%.

On a standard variable rate, it’s less straightforward – these can change at the lender’s discretion. Most reviewers say there is no reason the banks and building societies should not pass on the entire increase, so you should expect an increase. If your lender wanted, they could increase the rates further. For example, HSBC’s standard variable rate is 3.59%; if it reflects the full increase in paying borrowers, it will rise to a rate of 3.74%. On a £ 150,000 mortgage arranged over 20 years, the monthly repayments will increase by £ 11.66.

However, most of the borrowers resort to fixed rate mortgages. Interest rates have been so low in recent years that foreclosure has been attractive and, since 2019, 96% of new homeowner mortgages have been taken out at fixed rates. In total, 74% of outstanding mortgages are fixed and these borrowers will not see any immediate impact from the change.

Several million homeowners are no longer mortgaged, thanks to years of low interest rates and forced savings during closings. For them, the rate hike will have no impact on their housing costs.

What about my other loans?

Most personal loans are taken at fixed rates, so if you have unsecured loans, you must continue to pay them back as agreed. The Finance and Leasing Association doesn’t have figures on the percentage of auto and other variable rate consumer loans, but says most borrowing is done at a fixed interest rate.

Credit card rates are variable, but usually aren’t explicitly tied to the base rate, so they won’t increase automatically. Card providers can usually change rates as they see fit – recently, for example, American Express announced it would charge its cardholders more, blaming the rising cost of rewards. They are already at their highest level for 23 years.

What about my savings?

Savers have been the losers in years of lower rates, and when the base rate was cut last year, banks and mortgage lenders embarked on yet another round of cuts. In the summer, many accounts were only paying 0.01%.

Account providers are free to do whatever they want with the rates, so the Bank of England’s move won’t necessarily translate into widespread hikes. However, this should give those who want to attract money from savers the opportunity to come up with a better deal.

“This change in base rate may take a few months to pass through to savers who have a variable rate agreement, but there is also no guarantee that the rate will be passed on to them in full or not at all,” explains Rachel Springall, financial expert. on Moneyfacts.co.uk. “If savers saw 0.15% transferred to them, that would mean receiving an additional £ 30 per year in interest based on a £ 20,000 investment.”

Some suppliers have already started to increase their prices in recent weeks. Recently, for example, Hodge Bank increased the interest paid on its one-year fixed rate bond from 0.9% to 1.25% and the yields on its five-year bond from 1.80% to 2.08%. . Last month, NS&I raised the interest rate on its income bonds by 14 basis points, from 0.01% to 0.15%.

Will this have another impact on my finances?

If you have a private pension and want to purchase an annuity to provide income in retirement, you may qualify for the increase. Annuity providers invest in government bonds and government bonds are expensive when rates are low because other investors want to hold them. When rates rise, these other investors are inclined to sell the bonds, making them cheaper. As a result, annuity providers are able to offer better returns.

Annuity rates have already gone up and a rate hike could help those about to retire.


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