Interest rate rise looms: 5 ways to beat the hike

Laura Suter
2 November 2021

Laura Suter, head of personal finance at AJ Bell, comments: 

“The Bank of England could raise rates this week and banks and mortgage companies have already been quick to pass on increases to customers, even before a rise has hit. As we face a cost of living squeeze, with inflation set to go higher and taxes increasing from next year, many households can ill afford any increase in their costs. But by taking action now ahead of any rate rise, people can cut their costs and ensure they don’t end up being pinched.”

Fix your mortgage

“Anyone on a variable rate mortgage will see their interest rates go up overnight. For someone with a £250,000 mortgage* a 0.15 percentage point rise in their mortgage rate will add £228 a year, while a Base Rate rise to 0.5% will cost them £612 a year more. At £450,000 of borrowing a 0.25% Base Rate will mean £408 extra in costs and a rise to 0.5% will cost £1,104 a year more. 

“However, if you fix your mortgage now you’ll lock in current low rates and avoid an interest rate rise. Mortgage companies have already started to increase their rates, and they’ll rise again once a rate rise actually happens. Someone with £250,000 of borrowing on the average variable rate mortgage now could save £2,088 a year by switching to the current top two-year fix. If rates rise to 0.25% they would save £2,316 a year**. If someone wanted to switch for longer they’d save less each year, but more over the term of the fix.” 

*Assumes a repayment mortgage with a 25-year term, at the current average variable rate of 2.45%, based on BoE figures.

** Assumes a repayment mortgage with a 25-year term, at the current average variable rate of 2.45%, based on BoE figures. Switching to the top two-year fix of 0.99% from HSBC, on 80% Lona-to-value. Rate was still available at time of release.

Don’t fix your savings rate

“While a rate rise is positive news for savers, who’ve suffered more than 12 years of the Base Rate being less than 1%, fixing now means you’ll miss out on any increases. The top two-year fixed rate account is currently paying 1.76%, which is significantly more than the top easy-access account of 0.65%. But both those rates should rise after Base Rate increases – and if you’ve already locked in for two years you’ll miss out. 

“If you have £10,000 saved and put it in the top two-year fix now you’d have made £355.10 interest at the end of the two years, but if you wait and Base Rate (and savings rates) rise by 0.15 percentage points, you’d make an extra £30 in interest. If Base Rate rises to 0.5% and all that gets passed on to savings rates you’d make an extra £102 in interest at the end of the two years.”

Don’t assume all savings rates will rise

“Once a rate rise actually happens banks pass on the increase to their mortgage customers astonishingly quickly, often overnight. But savers will have to wait longer and often many won’t see any increase at all. If your money is sitting in your current account, you likely won’t see an increase in the interest rate you’re being paid, instead banks will pocket the difference to boost their profits. 

“But that doesn’t mean savers miss out, they just need to do a little more work to get a higher rate. We will see rates edge up and see more competition in the best buy tables as providers vie to reach the top, but you’ll have to switch to get a better deal.” 

Sort your debt

“Anyone with debt is going to really feel the pinch of an interest rate rise, as the interest on their borrowing will rise. Banks are very quick to pass on any rate rise to customers when it benefits them, so those with debt should be braced for higher costs straight away. Many families are in more debt following the pandemic, so seeing any increase in those costs will be very tough, particularly as we’re currently facing a cost of living squeeze and higher taxes. 

“The cost of debt has already risen in anticipation of a rate rise, with average overdrafts interest rates being 20.74%***, while personal loan interest rates also rose in September to 6.02% -- the highest since pre-pandemic times. 

“Anyone with debt needs to work out if they can switch it to cheaper borrowing, and get in quick before rates do rise. Look at whether you can transfer credit card borrowing on a 0% balance transfer deal, or see if you’re eligible for an interest-free overdraft. After that, people should list out their debt from the most expensive to the cheapest, regardless of the amount owed on each one, and prioritise paying off the most expensive before moving down the list.”

***based on Bank of England data:

Consider investing your money

“Even with interest rates rising, if savings rates rise by the same amount as Base Rate you’ll still be nowhere near beating inflation. The current top easy-access savings account pays 0.65% interest, if Base Rate rises to 0.25% and all of that increase gets passed on to savers then the top account will pay 0.8%. That’s still miles away from current inflation of 3.1%. At those rates after a year your money would be worth £230 less in real terms. What’s more, inflation is expected to average 4% over the next year, which means it’s going to rise much further from here. 

“Cash is a great place for short-term savings or money you need quick access to, but for long-term savings it’s not great. So, work out what you need in the next five years or as an emergency pot, and see how that stacks up against the amount you’ve got in cash. If you’ve got way more than that set aside, think about investing it.”

Laura Suter
Head of Personal Finance

Laura Suter is head of personal finance at AJ Bell. She is a multi-award winning former financial journalist, having specialised in investments. Laura joined AJ Bell from the Daily Telegraph, where she was investment editor. She has previously worked for adviser publications Money Marketing and Money Management, and has worked for an investment publication in New York. She has a degree in Journalism Studies from University of Sheffield.

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