On 22 June, the Bank of England (BoE) raised interest rates from 4.5% to 5%. This was the 13th consecutive increase since December 2021 and interest rates are now at their highest level since 2008.
The most recent increase was primarily due to inflation failing to fall as quickly as hoped. Although it’s some way off the October 2022 peak of 11.1%, the Office for National Statistics (1) confirmed that in May the latest rate of CPI inflation was 8.7%.
This is still far in excess of the government-mandated inflation target of 2% and BoE governor, Andrew Bailey, has made it clear that further increases to interest rates would be required if inflationary pressures continue.
Indeed, inews (2) have reported that markets expect rates to rise to 6% by the end of 2023.
You’re likely to see an immediate increase in the cost of borrowing
Mortgage lenders are usually quick to amend their interest rates after changes to the BoE base rate, so it’s likely you’ll be paying more very soon, unless you’re currently on a fixed-rate deal.
Although the main focus is on mortgage rates, it also means other borrowing is likely to become more expensive, such as on credit cards and car loans.
The one positive is the BoE’s determination to reduce inflation. Once it becomes clear that inflation is heading in the right direction, we should start to see rates fall.
It’s important to act if you’re coming to the end of a fixed-rate mortgage term
If you’re approaching the end of a current fixed-rate offer, you will almost certainly notice a significant difference in the rates you may now be able to secure.
In fact, Sky News (3) confirms that the average two-year fixed-rate mortgage is currently 6.47% (as of 4 July 2023), which is very likely going to be far higher than the rate you previously fixed at.
The key point we would stress to you if you’re in this position is to act now, this may be better than waiting to accept whichever rate your current lender moves you to.
If you are moved to your lender’s standard variable rate (SVR), you may end up paying higher interest than you would with another fixed-rate deal. Typically, a lender’s SVR is the most expensive option and, in most cases, is not recommended.
This is why it’s important to take proactive steps to manage your situation.
While consumer websites can be helpful for generic mortgage advice, many mortgage offers are only available through specialist intermediaries rather than direct to consumers. Rather than trying to manage the situation yourself, we would strongly recommend that you seek advice from a mortgage expert.
You may want to consider switching to a variable rate
The type of mortgage suitable for you will depend on your personal circumstances.
There are pros and cons for both variable and fixed rates, as well as specialist tracker mortgages that, as the name suggests, track the BoE base rate.
While a fixed mortgage rate gives you certainty over your monthly repayments, a variable rate is likely to immediately reflect falling interest rates when they do start to go down. However, if rates rise before they start to fall, you may find that you’re paying more than anticipated for longer than you had hoped.
Again, a mortgage specialist will be able to advise you on the best course of action, based on your individual circumstances.
The government has recognised that rising interest rates are causing concern for many mortgage holders
After discussions with leading mortgage lenders, the government have introduced a package of measures designed to help people struggling to meet increased monthly mortgage repayments.
Rising rates make it increasingly important to manage your finances
A big increase in your monthly mortgage repayments clearly makes it all the more important for you to have a clear idea of your monthly expenditure.
You may find yourself in the position of having to reduce your outgoings in order to meet a higher mortgage commitment. A good understanding of your household spending can really help you in this regard.
Read more: 7 simple budgeting steps to help you take control of your finances
Rising interest rates will also affect buy-to-let landlords
If you are a buy-to-let landlord with loans on several properties, increases to the cost of borrowing can seriously harm your financial stability.
According to a report published in This is Money (4), 8% of buy-to-let landlords are at serious risk. If interest rates continue to rise, the percentage adversely affected is likely to increase.
If you’re affected, seek help from an expert mortgage adviser, who will be able to help you make the right decisions regarding your borrowing commitments. They can also help by reviewing your property portfolio to see if divesting part of it could help improve your overall financial position.
Rising interest rates are good news for savers
Fortunately, it’s not all doom and gloom. Rising interest rates mean that the interest you can earn on your savings should also increase.
Ensuring you’re getting a better rate on cash savings could go at least some way to offsetting the increased costs on your borrowing.
It’s worth shopping around for the best rate available to suit your needs. Rates change day to day and week to week - the best easy access saver account interest rate was 4.65% at the time of writing (sourced from Moneyfacts (5) at 21 July 2023).
Furthermore, if you’re prepared to tie up your money for a fixed period, the best two-year fixed-rate bond is currently offering interest at around 6.0%.
Take some time to review your savings and ensure you’re getting the best rate possible on your money.
With interest rates at their highest level since April 2008, you may be tempted to keep more cash than usual on hand. However, with inflation still high, the real term spending power of money you keep in savings is shrinking.
As a result, while it’s sensible to keep readily accessible cash for emergencies, keeping more than six month’s expenditure in cash may not be appropriate.
In particular, funds that you don’t expect to need for five years or more may be better invested. Historical data shows that long-term investments typically beat the interest rate you might earn on cash savings.
The importance of expert advice
Faced with a tricky mortgage market, expert advice can help save you money and give you valuable peace of mind. While we don’t advise on mortgage arrangements, we can recommend an expert and make the necessary introductions.
We can also help you put together an effective investment strategy for longer-term savings.
Get in touch
If you’d like to review your financial plan and want professional advice and support, please get in touch. Email email@example.com or call us on 0800 055 6585.
The information contained in this article is based on the opinion of LEBC Group Ltd and does not constitute financial advice or a recommendation to any investment or retirement strategy. You should seek independent financial advice before embarking on any course of action.
Investments carry risk. The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
The Financial Conduct Authority does not regulate mortgage advice.
(5) https://moneyfactscompare.co.uk/news/savings/best-uk-savings-rates-this-week/Back to News & Views
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