With the Bank of England increasing interest rates for the first time in a decade, everybody and their neighbours are wondering what it means for them? First, take a deep breath because the world around you is still the same and second, read further to understand how your finances will be impacted.
Why did the Bank of England increase base interest rates?
The Bank of England has a mandate for price stability. You must have noticed that prices of almost everything starting from groceries to Legos have increased post Brexit as the sterling weakened. As the inflation rate recently increased to 3% – higher than the Bank of England’s target of 2% – and the unemployment rate has fallen to a 42-year low the central bank decided to increase the benchmark interest rate to 0.5%. For those of you who are interested in hearing about the rationale from the horse’s mouth watch this video.
I have a mortgage – will my interest payments increase?
If your mortgage is on fixed interest rate, then you are safe till the end of the term from any interest rate hikes. However, if your mortgage is on a tracker or on standard variable rate then interest costs are likely to increase for you almost immediately. Find out how your mortgage provider is reacting to the hike in interest rates by the Bank of England yesterday.
The average loan taken out by a first-time homebuyer in London is £317,253. Considering the mortgage term to be 25 years the average Londoner will see their interest repayments rise by £17 every month. We have also found an easy to use calculator so that you know exactly how much your interest payments will increase by every month – check it out!
Will my savings account pay me greater interest?
In an ideal world the interest rate paid on your savings account should increase by 0.25% immediately. In the real world, sometimes banks delay in passing on the benefits or don’t pass them at all to increase their profitability. In fact, when the same question was asked to the Governor of Bank of England, he said “We do expect it [base rate rise] to be passed on. Banks did pass on the cuts to their depositors, and we would expect competition to push it in the other direction [now].”
If your bank is not increasing the interest rate it pays on your savings account to match at least the BOE’s benchmark rate of 0.5% then maybe it is time to get yourself a new savings account. See which banks offer the best interest rates on saving accounts, minimum balances required and access features.
I am already repaying a student loan. Will I have to pay more interest now?
No, as the interest rate on student loans changes every September and is based on the RPI rate of inflation in the year up to the previous March. Rates on student loans taken out in England and Wales since 2012 have already seen an increase in interest charges of up to 6.1% from September 2017. Come March 2018 and you may see the interest rate on your student loan being changed again!
Will there be more base interest rate increases by the Bank of England in the coming years?
According to Mr. Carney, the governor of Bank of England, “about two more interest rate increases over the next three years” are expected. For those borrowing variable rate loans expect to shell out more as interest repayments in the coming years. If the term of your fixed rate mortgage is about to end, there is reason for you to worry too as the variable interest rates are likely to increase over the coming years. However, the Bank of England decides interest rates depending on incoming data on inflation and the economy and their forecasts can often go wrong especially with all the uncertainty surrounding the Brexit negotiations.
Have more questions about how the latest benchmark rate increase will affect you? Found any of our articles or suggestions useful? We would love to hear from you! Contact us here or email us at firstname.lastname@example.org