02 February 2022
The Monetary Policy Committee (MPC) will meet on Thursday, in a hotly anticipated decision which could see the first back-to-back interest rate rises since 2004. Against the backdrop of soaring inflation, which hit a 30-year high of 5.4% in December 2021, many economists expect an increase in rates from 0.25% to 0.5% on Thursday.
With an increase widely expected, Heather Owen, financial planning expert at Quilter discusses what a rate hike will mean for you ahead of Thursday’s meeting:
“We finally saw interest rates rise in December, though the increase was a modest 0.15%. While not yet set in stone, many are anticipating a steeper rise to come from the MPC meeting on Thursday.
“While the Bank of England’s interest rates may still be low in comparison to those levels seen in years gone by, any increase will still have an impact. When coupled with the growing cost of living, and the now confirmed National Insurance increase looming in April, the pressures will be keenly felt by many.
“If the rates once again increase as anticipated, those affected could benefit from seeking financial advice where possible to ensure they understand the impact of an interest rate increase on their personal finances, particularly if the impact is negative.”
Savers
“After a decade of rock bottom rates, cash savers welcomed the initial interest rate rise in December and would gladly accept a further increase. However, while welcome, the kinds of increases we are talking about are small. Even with a rate rise, cash savers will remain a long way from making money in real terms. Unless banks offer interest rates that match inflation, which is unlikely, cash will be losing value in real terms. However, there are steps you can take to help your savings go further:
- Banks tend to delay passing any increase onto customers, so savings rates may not go up as quickly or by the same amount as the increase. Cash savings will likely be impacted, so now is a good time to shop around for a better deal on your savings account rate.
- While we have seen increased market volatility in recent times, a well-diversified portfolio of investments remains the best option for long-term savers who are looking for their money to grow. Putting money to work in the stock market for five years or more gives it the best chance to grow at a greater rate than inflation. The sooner you invest and the longer you do it for, the more likely you are to have the potential for healthy returns regardless of short-term blips. However, it is important to remember that the value of investments can go down as well as up and you should seek financial advice where possible.
Home buyers
“While the property market was seemingly undeterred by the previous rate hike, with prices growing ever higher, a further increase and more expensive mortgages could have the potential to slow the seemingly never-ending increase in house prices and should therefore be welcomed by those waiting on the sidelines ready to buy a home, at the right price.
“However, we are still seeing supply struggling to keep up with demand, so we are perhaps more likely to see a price growth slowdown rather than an outright fall.
“Unsurprisingly, mortgage providers are quick to pass on rate rises to customers. The impact of a rate hike will vary depending on your circumstances, but there are some things to consider:
First time buyers
- If you are a first time buyer, you will likely be among the most heavily impacted by a rate rise. To get onto the property ladder, first time buyers often borrow the maximum amount available, meaning that on top of higher interest rates often associated with higher loan-to-value borrowing, rising living costs can squeeze the monthly budget even further. If possible, you should speak to a mortgage broker who can help you find the best deal for you.
Homeowners on a tracker mortgage
- Homeowners on a tracker mortgage based on the Bank of England’s base rate, or their mortgage provider’s Standard Variable Rate (SVR), will see yet another swift increase in their bills if the BoE opt to hike rates. If you are in this position, it may be wise to consider moving to a fixed rate mortgage to protect you from future rate hikes for a fixed period.
Remortgaging
- If you are on a fixed rate mortgage that is due to come to an end soon, it could be beneficial to seek advice from a mortgage broker now to help secure a better deal ahead of any rate rise. While none of us have a crystal ball, if you wait, you may find that rates are much higher.
Retirees
“Appeal for annuities has been declining due to low rates, but it could be boosted by a further interest rate rise. If rates do rise following Thursday’s meeting, those interested in annuity products could see better deals, so it is a good idea to shop around and see what is available. However, those who have already purchased an annuity would not benefit from a further rate increase as they are tied in.”
Those in debt
“Throughout the pandemic, many people took on extra debt to support themselves. Those in debt will likely suffer if rates rise further, as the costs of servicing the debt will likely be passed from the lender straight to the borrower. Banks will be quick to pass rate increases on in this instance so those in debt should be prepared for costs to rise rapidly.
“Universal Credit claimant numbers are likely to rise if there is a rise in rates and people fall further into debt, particularly alongside the current hike in living expenses. If you are in debt, it may be beneficial to:
- Switch to cheaper borrowing. If possible, you should look to switch ahead of any further rate rises. For example, you may be able to transfer credit card borrowing to a 0% balance transfer deal, or you can see if you are eligible for an interest free overdraft.
- Pay off debts with the highest interest rates first as these will cause a significant drag on your finances. Prioritise the most expensive and then move on to the next.
