The Bank of England has today announced that the UK's interest rates will remain at 0.5%. But with hints that rates will rise later this year, here are our top tips to prepare your finances and get ahead of any future increases
For the last few months, it’s seemed almost certain that the Bank of England would raise the UK’s base rate of interest this May.
But today the UK’s Monetary Policy Committee (MPC) voted to keep the interest rate at 0.5%.
Wait a minute - if nothing's changing, what’s the big deal?
Well, despite there being no changes today, the Bank of England has stated that they are on course for 3 rate hikes over the next 3 years, taking us up to a rate of around 1.25%. Some economists have predicted that the next increase could come as soon as August 2018.
And 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 also adjust their interest rates. This means a rate rise tends to make saving more attractive but can make borrowing much more expensive.
Here's how to get your finances prepared for any future rises.
1. Thinking of taking out credit? It could be worth doing it sooner rather than later
As the UK’s base rate of interest goes up, banks and lenders often pass this onto their customers. This means that the interest rates on mortgages, loans, and credit cards may also increase.
So, today’s news is good for borrowers, but if rates rise later this year, it does mean that any new credit you take out could become more expensive. 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 before the average rates go up.
Similarly, most personal loans and credit cards come with interest. So if the base rate goes up then 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 before rates go up.
2. See if it’s worth switching to a fixed rate mortgage
For now, it's good news for those with mortgages. But if you have a tracker mortgage, or you’re on your lenders’ standard variable rate (SVR), monthly payments will become more expensive if rates go up as expected.
It might be worth seeing if you can remortgage onto a fixed-rate so even if interest rates rise, yours won’t. This can give you more certainty and make it easier to budget. But if interest rates drop again, 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 extra 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 if rates do go up later in the year 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. So today's decision suggests that the Bank of England doesn't think the economy is quite strong enough to cope with higher interest rates yet.
The interest rate staying still is pretty frustrating for savers but good news for borrowers. But it's best to see today's news as giving you a head start, rather than an indication of what's to come. Acting now could help give you the peace of mind that you and your finances are prepared for the future.