Earlier this week (2nd August 2018), The Bank of England announced that the UK's interest rates will increase to 0.75%. An interest rate rise was expected in May, but the Bank of England decided to keep the rate at 0.5% to see if the UK economy would show signs of recovery.
Now that the rate increase is finally here, take a look at some of our top tips to prepare your finances and get ahead of this week's rise.
An increase to the 'base rate', which is set by the Bank of England, can have a big impact on different areas of your finances.
When the UK’s base rate of interest rate goes up, many banks and lenders will also adjust their interest rates. This means that, as a result of this week's rate rise, it tends to make saving more attractive but can make borrowing much more expensive.
Here's how to get your finances prepared for the latest interest rate rise.
1. Thinking of taking out credit? It could be worth doing it sooner rather than later
As the UK’s base rate of interest is due to increase to 0.75%, banks and lenders will often pass this onto their customers. This means that the interest rates on mortgages, loans, and credit cards may also increase.
Essentially, any new credit you take out could become more expensive in the long run. But don’t worry, there’s enough time to get ahead.
If you’re in the market for a mortgage, it might be worth seeing if you can speed up the process and lock in a fixed-rate deal if the rates go up in the future, which, due to the uncertainty of Brexit, is a real possibility, so act now.
Similarly, most personal loans and credit cards come with interest - there’s a chance that rates on loans and cards will also rise across the market. If you've been thinking about taking out credit, you can see your eligibility for loans and credit cards before you apply in your ClearScore, making it easier to be approved.
2. See if it’s worth switching to a fixed rate mortgage
This week's news has little effect for the estimated 70% of homeowners who are on a fixed rate mortgage. But if you have a tracker mortgage, or you’re on your lenders’ standard variable rate (SVR), monthly payments will become more expensive. It might be worth seeing if you can remortgage onto a fixed-rate so your rate doesn't change with the interest rate. This can give you more certainty and make it easier to budget. But if interest rates drop in the future, or don’t go up, then a fixed-rate mortgage could be more expensive overall.
Before you make the switch make sure to check the terms and conditions of your deal, particularly if there are any fees for an early exit.
If you already have a fixed rate mortgage your monthly payments won’t be affected. But if you switch to the standard variable rate after the rate goes up, it will be higher than it would have been before.
3. Re-assess your budget
With many of us already feeling like our finances are getting squeezed, the prospect of increased costs to borrowing may not be the most welcome news.
To help make sure you’re not caught out now is the perfect time to put together a plan to help you cover any increased costs you could face.
You may need to cut down somewhere else to be able to pick up the extra. Cutting down your other bills could help free up some additional money. See if you can switch to a cheaper energy deal for example, or maybe you can reshuffle your debts onto a 0% balance transfer card to avoid paying interest altogether.
If you do find yourself struggling, talk to someone sooner rather than later. There's lots of help out there, and it's certainly nothing to be ashamed of. Take a look at this article for more information on dealing with debt.
4. Maximise your savings without relying on the base rate
Interest rates have been pretty poor on most savings accounts for a few years now. And even when the Bank of England did increase the interest rate back in November 2017, only one in ten banks actually passed this onto their customers.
So, even though the interest rate is going up, it’s not guaranteed to be good news for the money you have tucked away.
But don’t worry, there are a few things you can do to make your money work harder for you without relying on the base rate going up:
Although the interest rates on many savings accounts aren’t that great at the moment, shopping around can help you get the best of a relatively bad bunch. Have a read of our article on different types of savings accounts to find one that’s right for you.
Lock away your money for longer
In general, the longer you lock your savings away for the better the return you’ll get. It might be worth looking to see if a notice account or a fixed term bond would work for you.
Think about investing
If you have a lump sum already saved and really want to make your money work harder, then it may be worth thinking carefully about your investment options. Investing involves taking some of your money and trying to make it grow by putting it into something, whether that's a company or an asset, that you think will increase in value. But all types of investments carry risks. Read our beginner’s guide to investing to find out if it's right for you.
How does the Bank of England decide what the interest rate is?
The Bank of England’s role is to make sure the UK stays financially stable. They are independent from the government and they decide what should happen to things like interest rates, in order to help control inflation and the growth of the economy. When they’re deciding what interest rate to set, they look at information about the general economy, such as house prices, inflation, and how much people are borrowing and saving. Cutting interest rates is usually done to boost the economy and get people spending. Interest rates tend to go up to cut inflation and when the economy is more stable. Mark Cairney, the governor of the Bank of England, suggests that this week's decision are based on what is (hopefully) a "smooth Brexit transition" and that UK households have remained relatively stable during the uncertainty of leaving the EU.
What's our view on the interest rate rise?
We spoke with Sarah Megginson, Business Development Manager here at ClearScore, who gave us her initial thoughts:
“The Bank of England’s decision to increase the base rate means that consumers may see borrowing become more expensive. This won’t mean that mortgages and credit cards will jump up overnight – in fact, we’ll probably see product rates change gradually over time.
We’ll also continue to see a decrease in the promotional offers available to consumers, which have been steadily disappearing over the past few months. This includes fewer offers on 0% balance transfer credit cards, interest free purchase cards and less generous cash back. We’ve already seen credit card providers reduce their interest-free balance transfer offers from 43 months last year to 36 months and this is expected to continue.
“We’re also seeing eligibility checks for financial products becoming more rigorous, with lenders more likely to offer products to those with a good financial history.
“The longer you wait to take action, the less likely you are get a good deal. If you already have a balance on a credit card, look at switching now before the available deals decrease further, moving to a card that still offers a long 0% balance transfer period or a low balance transfer fee. It’s also important to take note when any introductory offers on credit cards and mortgages end, so you can take action before you drift onto the lenders standard rate, which is often much higher.”