The Bank of England has today announced that interest rates are moving up a quarter of a percent to five percent. This is the second time rates have risen in the last four months as the Bank looks to raise the cost of borrowing in an attempt to reign in inflation which continues to sit slightly above the target of two percent1.
The rate rise is good news for savers who should see the interest paid on those savings increase. However this isn’t an automatic or instantaneous occurrence, it is still up to the banks and building societies to pass the rate rise on to consumers. However with rates seemingly on a slow upward curve at the moment this is a good time to be thinking about saving and making sure you have some money stored away for the future or in case of a rainy day. Find out more information on saving now.
The rate rise also has an impact on borrowing, especially mortgages which are more linked to the Bank of England rate than other products such as credit cards or bank loans. How much the rate rise will affect you will depend on the type of mortgage you have. If you have a fixed rate mortgage then your payments will be unaffected. However if you have a variable rate mortgage then it is likely that the rise in rates will signal slightly larger repayments – on average this is likely to be around £20 a month increase on a £100,000 mortgage.2 Try out the Moneybasics mortgage calculator here.
It is vital that you bear possible interest rate rises in mind when you consider taking out a mortgage. It is always hard to predict exactly what the base rate will look like in the future but it seems unlikely rates will fall again any time soon. Rates are still at roughly half the average of the last 20 years so any financial decision must be taken bearing in mind that rates might well rise and people should budget for potential increased costs in borrowing if they do. Always make sure you are in a position where any foreseeable rise would not leave you over-stretched.
Keep your eye on Moneybasics for future news on interest rates and any other personal finance developments which could affect your money situation.
1. Bank of England 2. Halifax
Associate Director, Credit Action
Tel: 0207 636 5214