The Bank of England have announced that the UK’s interest rate have increased for the first time since 2007. But what does this mean for you and your wallet?
The UK’s interest rate (known as the base rate) has remained at a low of 0.25% for over a year. But at 12pm on the 2nd of November, the Bank of England announced their decision to raise the rate by 0.25% to 0.5%.
When the UK’s interest rate goes up, it makes saving more attractive but can make borrowing more expensive. Banks and lenders pass on the interest rate rise to consumers by charging more for credit and by offering better rates for saving.
Here's how the decision will affect your mortgage, savings, credit cards and loans.
What it means for your mortgage
As the UK’s base rate of interest goes up, mortgage rates will increase.
The general interest rates offered on fixed-rate mortgages has already started to rise slightly. This means new mortgage deals may cost more than they would have a few months ago.
For those with a tracker mortgage, or those on their lenders’ standard variable rate (SVR), monthly payments will become more expensive. If you have a mortgage balance of £150,000 then your monthly payments could increase by around £18 per month. That’s a total of £221 extra per year.*
If you have a fixed rate mortgage, your monthly payments won’t be affected. But when you switch onto the standard variable rate, it will be higher than it would have been before.
What you can do:
Get to know the deal you have. What rate are you paying? Are you still on the introductory deal, and if so when does that come to an end? Are there any terms and conditions for early exit? How long do you have left?
Make a budget. This is to help make sure you have a buffer in place to cover the increase. You may need to cut down somewhere else to pick up the extra.
Consider switching to a fixed-rate mortgage, if you're on a variable rate. With the initial increase there’s a chance rates could creep up further in the future. 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, then a fixed-rate mortgage could be more expensive overall.
Now might be a good time to take the plunge. If you’re looking to get a mortgage soon, 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.
What it means for your savings
If you have savings tucked away, or you're looking to start saving, the rise in interest rates is good news. Many banks will pass on the hike in the form of higher interest rates on savings accounts and other products, which can help make your money work harder. But bear in mind that, unless your account is specifically linked to the base rate, savings providers aren't obliged to change their rates, but most probably will.
Fixed rate ISAs, accounts and bonds won’t be affected by the change.
What you can do:
Wait and see how banks react and brush up on the different types of savings products so if things do get shaken up, you can take advantage.
What it means for your credit cards
When you spend money using a credit card, you have to pay back the money you owe plus interest. This rate (known as the APR) will be set out when you apply for a card. Now, the interest rates on any new credit cards you take out may have higher interest rates.
If you already have a credit card, providers could increase the rate of interest you pay on cards you already have. But there are lots of rules surrounding when they can do this. Providers can't change your terms if you’ve had the card for under 12 months and they can’t change it constantly. If your provider does put your rates up, they have to notify you first so you can close the account and pay off the balance at the original rate.
What you can do:
If you only pay the minimum amount each month, you’ll be paying interest on top. If you can, try to pay your balance in full every month, this way you can avoid paying interest altogether.
What it means for your loans
When you take out a loan, the interest rate is normally agreed at the start meaning that it cannot change. So any fixed-rate loan repayments shouldn’t be affected by a hike. However, any new loans you take out may be more expensive.
What you can do:
If you’re already set on getting a loan in the next few months, it may be worth taking it out sooner rather than later, incase rates creep up further.
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 there’s everything you need to know about the breaking news.
*source: BBC News