The Bank of England has increased interest rates to 0.75%, despite warnings it would plunge households who are already struggling into poverty.
Members of the Monetary Policy Committee (MPC) voted to raise rates on Thursday. The Bank wants to cool soaring inflation and Governor Andrew Bailey recently appealed to workers not to ask for big pay rises, the Mirror reports.
Rates had been at 0.1% until December last year, when the Bank moved to prop up the economy following the end of covid lockdowns - raising it to 0.25%. On February 3, 2022, it was raised again to 0.5% - the fifth rates increase in recent months.
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Dominik Lipnicki, director of Your Mortgage Decisions said: “There are specific reasons for the current inflation we're seeing and the Bank of England raising the base rate will do very little to fix the problem. We have all seen huge energy price increases and more are yet to come. Coupled with the upcoming National Insurance hike, this means that many people will struggle and have to choose between heating and eating.
"By increasing their mortgage payments, this financial strain will only become more severe. We have a very tough year ahead and raising rates now is not the answer." The rise will impact people's savings, mortgages, and loans and debts.
Savings
In normal times, a rise in the base rate would mean more interest on your savings - but in recent years this has not always been the case. Rachel Springall, Finance Expert at Moneyfacts.co.uk, said: "Not one of the biggest high-street banks has passed on the last two BOE base rate rises to savers who have an easy access account, and as some of these rates are as low as 0.01%, it’s imperative savers reconsider their loyalty and switch away from these brands to something more attractive**.
"As we have seen time and time again, there is no guarantee savings providers will boost their rates because of a BOE rate rise and even if they do it could take a few months to trickle through to customers. Should savers see 0.25% passed onto them, it would mean receiving £50 more a year in interest based on a £20,000 investment.
“Challenger Banks and building societies have not been shy to compete in the easy access space, and if they have the same protections in place as the biggest high-street banks, then there is little reason to overlook them in favour of a more familiar brand.
"The top rate tables are experiencing a positive uplift and there is hope that rates will continue to rise, however, we may not see pre-pandemic interest rates for some time yet.”
Mortgages
The Bank increased interest rates from record lows to help stave off rising inflation - but homeowners who are not careful could find it leads to higher monthly mortgage payments. Those who are on lender revert rates or Standard Variable Rates (SVRs) will have to wait and see if their lender will pass on the rate increase in full or only in part.
Meanwhile, those who have a tracker rate mortgage are more likely to see the rate passed on in full, and possibly as soon as their next mortgage payment. Some of these rate changes could kick in before the end of today. A fixed rate mortgage could provide a safe haven against the rise as it locks you in a deal for a set term - but you'll have to act fast as these have already been rising since the last base rate rise and banks will start updating their rates further from today.
A mortgage broker can help you find the most suitable deal for your circumstances and factor in true costs. It’s important to not only think about headline rates, but also assess any additional fees that may be involved. The Office of Budget Responsibility (OBR) has also predicted that rates could reach 3.5% by 2023. This means we may be seeing the beginning of the end of the era of record-low interest rates.
For homeowners with fixed deals expiring in the next six months, it could make sense to fix your mortgage costs to protect yourself against further household bills price volatility. But for anyone with deals expiring mid-2022 and beyond, watch out for any early repayment charges.
You'll need to weigh-up whether paying an exit fee to remortgage early is financially worth it. Ultimately, your mortgage is based on how much of your debt is still outstanding.
So with interest rates still very low on savings, it might be worth considering paying off some of your debt in the form of an overpayment. Check the small print on this - most lenders will let you overpay by around 10% a year fee-free.
Swen Nicolaus, chief capital officer at mortgage lender Molo said "As a simplified illustration, first inflation goes up and the Bank of England tries to combat that. They increase the interest rates and retail banks increase their savings rates. This will attract more depositors who will want to have higher deposit rates. These higher deposits rates translate into higher costs for the banks who have to charge higher mortgage rates to compensate.
“For people who are looking to buy a house and are worried about how inflation will impact mortgage rates, we’d recommend exploring longer term fixed rate mortgage options. While it’s difficult to predict when, where and how the impact of rising interest will set in for mortgage rates, a long term fixed rate can mitigate some of the risks and provide stability.”
Iain McKenzie, CEO of The Guild of Property Professionals, added: “Those on fixed-rate mortgages are safe for now, but consumers should keep an eye on interest rates in case their deal is up for renewal soon. Our research indicates that about 1.5 million fixed-rate mortgages are expected to end this year and next.
“All the latest figures continue to show that house prices are climbing across the UK, with strong demand in many areas driving this upward trend. Prices have increased 20% since the start of the pandemic and the industry has been expecting a readjustment for a while.
“It remains to be seen whether another interest rate rise will dampen the demand for properties and deter first-time buyers worried about mortgage payments. Prospective buyers will need to find a way of balancing their finances to afford the rising cost of living, if house price growth doesn’t cool down enough for their budget.”
Debts and loans
Most personal loans are based on fixed rates, so if you have unsecured borrowing you should continue to repay it as agreed. Credit card rates are variable, but not typically explicitly linked to the base rate, so won’t automatically go up.
Card providers can usually change rates as and when they want – recently, for example, American Express announced it would be charging its cardholders more, blaming the rising cost of offering rewards. They are already at a 23-year high.
Neil Kadagathur, chief executive of Creditspring, said: “This was desperately needed but ultimately doesn’t go far enough. We’re already in a cost of living crisis and the situation is going to get a lot worse when energy bills start to soar and inflation gathers pace.
"The hope is that this rise slows down the increase in the cost of key goods and alleviates some of the pressure on households whose budgets have taken a battering in recent months. Living costs aren’t rising as a result of monetary policy, but monetary policy could provide a lot more support to those who need it most. And sadly, those who are seeing the real value of their wages stagnate or decline are the ones who will be hit hardest.
“We’re in danger of creating a generation of people for whom spiralling debt is simply a fact or life. Amongst 18-34 year olds, a third will have to borrow to survive the next few months – this figure will soar in the coming months unless more effective support is offered to the most vulnerable households. Borrowing is set to become more expensive, disproportionately hurting lower-income households and borrowers.
“Is this really the best time to implement a National Insurance hike? The Chancellor’s statement next week will have to address the elephant in the room – millions of households are struggling to keep their heads above water and additional NI bills, coupled with all the other rises they’ll have to bear, could be the final straw.”
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