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Are you prepared if interest rates rise?

With interest rate in the news again, the spotlight is on whether the Bank of England will allow rates to remain at the record low of 0.5%.

No one knows when or whether interest rates will change any time soon, but it’s likely they will start to rise by small amounts. As such, it makes sense to start budgeting for any potential rise.

How will an interest rate rise affect your mortgage?

When it comes to repaying the mortgage, it’s essential to have a plan.

Around three in four homeowners are expected to face an increase in their mortgage payments if the Bank base rate changes, according to TSB. Given more than half of all mortgage holders are already struggling to pay bills, it’s important to be aware of what the impact of this may be.

Establishing what you have at the end of the day, after you’ve accounted for any spending, is essential.

Once you know your disposable income you are in a stronger position to deal with any interest rate changes.

How much do you need to save if interest rates rise?

Until interest rates actually rise and mortgage lenders adjust their rates it’s very hard to say what additional cash you’d need to find each month.

This doesn’t mean it’s best to sit tight and do nothing, as any savings you can make now will soften the impact of rises later on.

You could use a mortgage rate calculator to see what extra you’d need to cover in the event of a 1%, 2% or even a 3% rise.

This isn’t to say that interest rates will rocket up by 1% or so in one go, but this is where they may be after a series of 0.25% or 0.5% rises. So it makes sense to start making provisions now.

Prioritising debt

Interest rate changes don’t just affect homeowners, as anyone with a credit card will find out. Should the base rate increase the variable rate applied to credit cards will also change.

The extra amounts you’d pay, unless you always clear your balance, could be relatively small. But it’s an additional expense that would hamper your efforts to budget for higher mortgage or rental costs.  

Fixed credit and loans

Anyone who has a fixed-rate loan may feel under less pressure, but rising interest rates will probably affect you when your short-term unsecured loan is up.

Nowhere is this more important than if you need a new mortgage or a further loan, as you could find monthly repayments are higher than you’re used to covering.

When it comes to credit cards, you’ll probably hear that it’s unlikely you’ll see any immediate change in the rates you pay. However, some providers’ rates do track the Bank of England base rate, so be prepared for a change in your credit card rates.

What’ll rate rises mean for savers?

You may see a positive impact on savings as a result of any increase in interest rates. If there is an upturn, be prepared to switch accounts. Also, now may not be the best time to leap into a long-term fixed savings account as you could lose out if rates rise, due to any exit fees you’d need to pay to move your money to a better paying option.

What about your pension?

If you’re looking to buy an annuity, any rise in interest rates could improve the offerings that are available. So, keep your eyes peeled for any good news following a rate change.

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