Laura Suter, head of personal finance at AJ Bell, comments:
“It’s 19 months since the Bank of England slashed interest rates to their lowest ever, in a bid to prop up the economy during the pandemic, but it seems many are calling time on rock-bottom rates. It’s now widely expected by economists and investors that a rate rise is on the horizon, with expectations of an increase from 0.1% to 0.25% this year and another nudge up to 0.5% next year.
“A rise to 0.25% will only take us back to where we were last March, when rates were cut in the Bank of England’s unscheduled move. But for many households it’s the worst possible timing as any increase will come hand-in-hand with increasing household bills and a squeeze on finances this winter. While rates will edge up, rather than leap overnight, any shift higher may be the match in the powder barrel for some families.”
“Mortgages rates have been at rock-bottom lows for some time now, and many homeowners have never known an environment of higher interest rates. While rates won’t sky-rocket, homeowners need to be prepared for an edging up of their costs.
“Mortgage providers don’t hang around when it comes to passing on rate rises, so anyone on a tracker deal will see their costs go up immediately. If 0.5 percentage points is added to mortgage interest it adds about £50 a month to the cost of a £200,000, 25-year mortgage, or around £120 a month extra to a £450,000, 25-year mortgage.
“First-time buyers will feel any rise the most. Some have borrowed up to their affordability limit just to enable them to get onto the property ladder, and so will find additional monthly costs harder to swallow. First-time buyers also typically have a higher loan-to-value, or lower deposit, meaning they have more borrowing on the average property and already have higher mortgage rates.
“Fixing might be a good option for homeowners on a tracker deal who think rates will only continue to increase. Anyone in this position should get a move on, as if a rate rise becomes more certain we’ll start to see mortgage rates edging up ahead of any announcement.
“Anyone on a fixed-rate deal will be protected from any increases. However, those nearing the end of their deal may find rates have got much higher when they come to re-mortgage. One helping hand for homeowners is that property prices have increased, which means when they come to re-mortgage this increase coupled with their mortgage repayments mean their loan-to-value should have improved, and so they can access better rates.
“Some people may have been using the money they have saved from the current low rates, and so lower monthly repayment amounts, to overpay on their mortgage. Lots of people have also saved money in lockdown and may have been wondering how to spend that, but with mortgage rates having been so low there hasn’t been much incentive to use spare cash to pay off your mortgage debt. However, if rates are rising that may tip the scales in favour of paying down the loan.”
“Cash savers have born the brunt of more than 12 years of Base Rate being below 1%, with average cash rates dwindling to new historic lows every month. Any rate increase by the Bank will be a bright spot for savers.
“However, before they start celebrating in the streets, savers need to remember that banks are slow to pass on any rate increases and rarely pass them on in full. So we’re unlikely to see savings rates shoot up overnight by the same amount as the Base Rate increase.
“But we will see rates slowly edge up and see more competition in the best buy tables as providers vie to reach the top. Any increase in rates will mean more people think it’s worth their time to shift their money out of accounts paying 0.01% and into accounts that pay far more.
“Anyone considering putting their money into a fixed rate account now needs to think carefully about what they think rates will do in the near future. Any increase in the Base Rate will translate into higher rates in the fixed-term market, so savers might want to wait to see how that plays out before they lock their money up for a long period.”
“The real losers of any rate rise will be those with debt, as the cost of credit cards, personal loans and overdrafts will increase with any Base Rate rise. Unsurprisingly, banks are pretty speedy to pass on any rate rise to customers when it benefits them, so those with debt should be braced for higher costs.
“The timing will be very unfortunate for many families who had to take on extra debt during the pandemic just to pay essential bills. This winter is likely to push more people further into debt as many have seen their income fall, due to the reduction in Universal Credit, and are seeing most big household expenses rise.
“The average interest rate paid on personal loans is already at the highest rate since March last year, at 5.85%, while the average overdraft interest rate is 20.35%. Debt on credit cards is just under 18% at the moment, but many people will be paying much more than this.
“Anyone with debt should look at moving it to a cheaper rate and locking that in ahead of any rate rise. There are a number of long 0% balance transfer deals available at the moment for those in the red on their credit card: Santander, M&S Bank, Natwest and Sainsbury’s Bank are all offering more than 20 months interest-free.
“If moving your debt isn’t an option then list it out 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.”
“Despite not being the default for retirees, annuities are still bought by around 10% of people who retire each year. Their appeal has dwindled in recent years as rates have been so low, and there’s no solace for those who’ve already bought an annuity as they’ve locked in their rate. But rising rates is good news for future retirees, as higher Base Rate should filter through to higher annuity rates.
“We’re not expecting a stampede for the annuity aisle though, a few extra crumbs of interest aren’t going to make these products significantly more appealing, particularly against a backdrop of high inflation.”