The Bank of England announced in early November that it would increase the base interest rate by 0.25 per cent. This change, the first in ten years, w
The Bank of England announced in early November that it would increase the base interest rate by 0.25 per cent. This change, the first in ten years, was primarily driven by a desire to meet its legal mandate to keep inflation low after the rate recently increased to three per cent. The rise to a 0.5 per cent base rate appears small at first glance, but it has a myriad of knock-on effects, especially since borrowing costs have not increased since 2007. Here are several changes you can expect in the coming months.
Mortgage rates will increase
More than nine million households in the UK have a mortgage, with about 50 per cent of those being on a standard variable rate, or tracker, loan. Those with an outstanding balance of £50,000 will now have to pay £225 a month, which is a £6 increase, while those in the higher bracket who owe £300,000 will have to pay £39 more at £1,350 a month. However, the market is now skewed towards fixed-rate mortgages, so the vast majority of people are unlikely to feel the pinch immediately.
“The big changes that have taken place in our housing market over the last decade mean that barely one in ten families are at risk of seeing the overnight effect of today’s interest rate decision through higher mortgage costs,” Resolution Foundation’s chief economist, Matt Whittaker said. However, those on fixed rate mortgages could be affected at a later date if they remortgage their property.
More expensive loans
The Bank of England’s decision to hike the interest rate will make personal loans more expensive again after a notable drop following the EU referendum. It was possible to secure a loan for £5,000 with an interest rate of just eight per cent between June 2016 and November this year. However, the base rate interest increase means unsecured borrowing costs are set to rise in tandem. While the BoE may view this as a positive due to the concerns about spiralling personal debt, credit rating agencies have warned that households with less money could struggle to make ends meet. The National Debtline also expects calls for debt advice to soar.
Modest pension rise
Annuity rates have tumbled during the last 18 months, but the interest rate rise should kick-start a recovery and enable pensioners to earn more from their savings. However, it will only be a modest uptick as a 65-year-old with a £100,000 pension pot will earn £4,468 per annum, which is an increase on the recent figure of £4,086. However, it is still markedly short of the £15,000 annual income for the same annuity seen back in the 1990s. Experts also believe the radical transformation in the pension landscape is unlikely in the foreseeable future due to “historically low” interest rate levels.
Savers will earn slightly more
The modest benefits also extend to savers, who have only seen meagre returns for current account deposits recently. The BoE says the annual paid interest is currently 0.14 per cent, so an individual with £5,000 in bank savings will benefit to the tune of £14 a year. Those earnings will now increase slightly as several lenders, including Yorkshire Building Society, TSB and Nationwide have confirmed that the 0.25 per cent interest rate will be passed on in full. However, the returns are still some way short of those available just two years ago, and the situation is unlikely to change drastically anytime soon.
Businesses could suffer the most
Nearly half a million UK enterprises are currently in financial disarray and professional services consultancy, Begbies Traynor, has warned that many could go under if they are no longer able to access cheap credit and inexpensive labour. The situation has already been exacerbated by Brexit, and rising interest rates could be disastrous for companies who have taken too many risks and are struggling with higher levels of debt.
How to address financial concerns
Fortunately, both homeowners and enterprises worried about their finances following the BoE’s decision have various options available to them, including effective asset management. Matthew Smith BNP Paribas specialises in the systematic process of developing, managing and disposing of assets cost-effectively. Socially responsible and sustainable investments can have a transformative impact on financial prospects for both corporates and individuals, and Smith uses his expertise in the derivatives sector to reduce risks and achieve long-term gains.
2018 and beyond
Further rises in base interest rates are expected, and though they will be small, a gradual increase could lead to a notable overall hike in mortgage and the costs associated with debt compared to earlier this year. The full impact of the interest rate rise is not yet set in stone and will continue to change through 2018.