The Bank of England (BoE) sets the bank rate (or ‘base rate’) for the UK. The current rate is 0.25%. This influences the interest rates (the cost of borrowing or lending) set by financial institutions such as banks.
A rise in interest rates could make paying back your mortgage more expensive if you are on a variable rate deal, or increase the cost of new fixed rate borrowing. On the other hand, you might see an increase in the return on your savings.
The impact any change in interest rates will have on you depends on:
- How much debt you have
- What type of debt you have
- How much savings you have
For example, if you have borrowed a lot of money on a mortgage, an interest rate rise could mean your monthly repayments become unaffordable and put you under increased financial pressure. This could lead to future money problems.
How will mortgages be impacted?
Whether you are affected by an interest rate change will depend on what type of mortgage you have.
If you have a variable rate mortgage, your mortgage repayments could cost you more if interest rates rise. If you have a fixed rate mortgage, a change in interest rates won’t impact you till you reach the end of your current deal. However, you may find remortgaging more expensive.
Have a financial plan in place
It’s a good idea to have a financial plan in place to deal with any potential interest rate changes. Current forecasts indicate that changes are likely to be small, but steady, so while a 0.25% rate rise might not set alarm bells ringing, several consecutive raises could have a significant impact.
The table shows how much more you’d have to pay on a £200,000 mortgage (where the current interest rate is 2.5% and monthly repayments are £897) if interest rates increase.
Seven tips for managing an interest rate rise on your mortgage
1. Work out your disposable income
Your disposable income is the money you have left after all your outgoings, such as your mortgage, bills and council tax, have been subtracted. Our Budget Planner gives you a clear picture of where your money goes. It lets you can see how much money you have left over now, and whether you could cope with an increase in interest rates.
2. Cut-back on your spending
If you don’t have much money to spare after your outgoings have been paid, you may need to find ways to boost your bank balance. Use our Quick cash finder to see how much you could save by cutting back. A little preparation could help you discover ways to cover the impact of an interest rate rise.
3. Pay off outstanding debts
It’s vital to stop creating new debt and clear any debts you have. If you have several debts to clear, work out what needs to be paid off first and create a plan to help you take control.
4. Get debt advice if you are struggling
If you can’t clear your debts and you’re concerned about your finances or worried that a rise in interest rates could tip you over the edge, we have advice on how to take action to reduce your debt. If you think you might need more help, find out where you can get free debt advice.
5. Overpay on your mortgage
With mortgage interest rates so low, some argue that there’s no point in paying off your mortgage early while others argue that paying off debt is always a good idea in the long term.
Despite this, overpaying your mortgage can reduce the term of your mortgage and/or the size of your mortgage repayments. Make sure you find out what penalties and fees may apply and if they cut into any savings, which result from overpaying your mortgage. Many lenders will let you overpay at least 10% a year without penalties. Overpaying when interest rates are low means you’ll have a smaller mortgage to be charged at a higher interest when rates rise.
6. Consider switching or fixing your mortgage
You don’t need to wait until a change in interest rates is announced. You can save hundreds – perhaps thousands – of pounds by shopping around, so it’s a good idea to review your mortgage at least once a year to check whether you should switch to a better deal. You might consider speaking to a mortgage adviser, also known as an independent mortgage broker, who will advise you on all the fees associated with fixing or switching your mortgage.
7. Build an emergency fund
You want to get your emergency saving fund set up as soon as possible, but like with all savings it’s best to stick to what you can afford and save regularly. A good rule of thumb is to have three months’ essential outgoingsavailable in an instant access savings account. Find out more in Getting into the savings habit.
How will interest rate changes affect other borrowers?
If you have a credit card, your card provider may respond to a rise in the Bank of England base rate by passing on some or all of the increase. This is one very good reason to ensure you manage your finances so you pay off the outstanding balance each month and incur no charges. If you only make the minimum repayment your debt could take much longer to pay off and in that time you could be paying hundreds of pounds in interest.
Personal loans are loans that a bank or other lender makes that are not secured against any asset such as your property. They’re also known as unsecured loans. The interest rate on a bank loan is agreed up front and so won’t be affected by any rate increase that occurs while the loan is being repaid. However new loan rates may be higher.
How will interest rate changes impact savers
Interest rate rises aren’t all doom and gloom. Savings rates are likely to increase with interest rates, giving you a higher rate of return on any savings you put into a Cash ISA or savings account. If you have a fixed-rate savings account or a bond, a bank rate increase shouldn’t make a difference until the end of the term.
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