3 August 2023
If you are covering the latest interest rate increase from the Bank of England, please see the following comment from Rosie Hooper, chartered financial planner at Quilter:
Savings
"For those accumulating wealth, this hike might translate into improved yields on savings accounts, as banks and building societies recalibrate their interest rates however so far not all financial institutions have been quick to move. Therefore, it's crucial to survey the market for the highest rates as not all banks accelerate their rate increments at the same pace. Additionally, other forms of savings products such bonds, ISAs or investments should be taken into account.
Pensions
"The increase in interest rates may benefit annuity rates, as they have a direct connection to government bond yields. Higher interest rates typically result in elevated bond yields, which consequently improve annuity rates. This suggests that retirees on the brink of acquiring an annuity could enjoy a superior income throughout their retirement phase. Those nearing their retirement should vigilantly track interest rates and bond yields, and seek financial advice to help plot the optimal retirement course.
Mortgages
"The surge in interest rates will particularly impact those with standard variable rate or tracker mortgages, who will see a steady rise in their monthly payments due to the Bank of England's uptick in rates. The consequential effect is already visible on property transactions and house prices as the market remains subdued as high rates dissuade borrowers from buying properties However, for homeowners locked into fixed-rate mortgages, this change will not touch them until the end of their fixed term.
"The prevailing view is that even when interest rates do drop they are unlikely to reach anywhere near the ultra-low levels that they were a during the pandemic and before. Therefore if you are coming up to the end of your fixed term it’s important to bear this in mind as opting for a short term fix in the hope things might be considerably better in two years may not materialise.
Credit and debt
"With the Bank of England increasing its base rate, credit card holders might experience a hike in their card's interest rate, making outstanding balances more costly. To mitigate the effect of escalated interest expenses, card users should contemplate clearing outstanding balances promptly or consider balance transfer alternatives to benefit from lower rates. Moreover, credit card users need to manage their expenditure and steer clear of additional high-interest debt, given that elevated rates can make it harder to clear your balances in the future.
"Individuals saddled with debt, such as personal loans or car loans, might find they owe higher interest expenses in this new rate environment. To offset the rising cost of debt service, it's vital to focus on eliminating high-interest debt first and consider consolidating or refinancing loans to secure smaller interest rates. Strategies for debt management, including budgeting, cutting out needless expenditures, and even finding extra income through supplementary employment or side gigs, can help individuals manage their debt payments."
