11 May 2023
If you are covering the latest Bank of England interest rate decision and how it impacts personal finance, please see the following comment from Rio Stedford, financial planning expert at Quilter:
Debt
"Sadly, those already in debt, particularly unsecured debt, will find higher interest rates makes their problem worse. Often higher rates are quickly passed down to those in debt intensifying their problem. To counter the increased cost of servicing debt, it's crucial to prioritise paying down high-interest debt first and explore options for consolidating or refinancing loans to secure lower interest rates.
"Debt management strategies, such as creating a budget, cutting unnecessary expenses, and increasing income through additional work or side hustles, can also help individuals stay on top of their debt payments and avoid potential financial strain caused by rising interest rates. People should avoid getting into debt with their credit cards if possible too and only use them to pay for things that they know they can pay back that month. For anyone struggling with debt it is crucial not to bury your head in the sand and seek help sooner rather than later.
Mortgages
"When interest rates rise its clearest impact is often on mortgages as so many people have this type of debt in the country. Mortgages are typically people’s biggest outgoing and set the pace for all other spending, so if money is sucked into mortgage payments it leaves less for consumers to spend out in the economy. Another increase in the base rate will increase the monthly bills for those on variable rates and tracker mortgages. Those on fixed rate deals are safe from increases until their deal ends but as rates rachet up it increases the pain people will feel when their deal eventually comes to an end if it’s in the short to medium term. Ultimately, anyone whose ultra-low fixed rate deal will be in for a nasty shock when they step out into this new interest rate environment.
Savings
"The increase in the base rate will push banks to offer savers better returns on their cash savings accounts. At present, the rate of interest you can achieve on most savings accounts is still below par. Similarly, even the best rates offered by bank accounts are offering people a real terms loss due to inflation remaining so high. In fact, the Commons Treasury Committee has recently widened its campaign for banks to increase the savings rates offered to loyal customers questioning why a variety of banks have interest rates that are much lower than the current interest rate. The campaign looks at how banks and building societies determine the level of interest rate increases to pass on to savers, and whether they inform their loyal customers that higher alternatives may be available.
"To achieve a better rate consumers should look into locking their money away for a longer period or better yet setting their money to work in the stock market which historically has achieved better returns that cash savings.
Pensions
"Higher interest rates are not necessarily a bad thing for pensions as pensioners should in the main not have to contend with interest on any debts as these should have already have been cleared. For those with defined contribution schemes, higher interest rates can mean a greater return on any wealth on any fixed-income assets such as bonds as newly issued bonds will carry higher interest rates.
"However, we shouldn’t forget that part of the reason for high interest rates is to combat high inflation and pensioners will be finding that any income they take from their pension may not be stretching as far as before due to the cost of living. Any positive impacts on pensions as a result of interest rates are therefore likely negated by inflation.
"A rise in interest rates can have a positive effect on annuity rates, which are closely linked to government bond yields. Higher interest rates generally lead to higher bond yields, which in turn lead to better annuity rates. This means that retirees who are about to purchase an annuity could receive a higher income throughout their retirement.
"Individuals nearing retirement should closely monitor interest rates and bond yields and consult with a financial adviser to determine the best course of action when considering purchasing an annuity."
