How will savers and borrowers be affected by the rate hike?
Yesterday the Bank of England raised its policy rate by another 0.5% to 2.25% – the highest rate since the financial crisis in December 2008.
It is a move implemented by the central bank in an attempt to tame inflation, which currently stands at 9.9%. But most experts worry that the increased cost of borrowing will simply add another financial pressure to those already burdened by the rising cost of living.
“This is the kind of painful pressure that borrowers have been afraid of, the BoE has tightened interest rates another notch – putting more pressure on borrowers, who have not seen rates like this in 14 years,” said Sarah Coles, senior personal finance analyst, Hargreaves Lansdowne.
“It’s accumulating additional interest charges at a time when we can’t afford it.”
In fact, this is the seventh straight hike since December and will be another blow to those with a variable or tracked mortgage – which are automatically affected by a hike in base rates – and anyone with a fixed rate on the verge of expiring.
Sarah said: “The Bank of England now expects inflation to peak lower than previously expected, at 11% in November.
“Energy price guarantee has been instrumental in controlling headline inflation, and protecting it from fluctuations in international energy prices. However, it was not enough to convince them that price hikes would be brought under control without another significant rise.”
What does a higher base price mean for savers
Sarah said savers would welcome the return of higher rates, but not if they are stuck earning less than half a percent of interest in an accessible account with one of the big street giants.
Since not all providers pass rate increases, those who are keen to find the best rates may have to lock up their money for specific periods of time.
According to figures from AJ Bell, the top easy access savings rates have jumped from 0.65% before the Bank of England started raising rates, to 2.1% now.
Laura Sutter, head of personal finance at AJ Bell, believes it will rise further after the latest base rate hike. But she urged anyone with savings to be proactive and look for the best deal possible.
She explained, “Most savers will lose. Millions of pounds will be put into accounts that earn very little interest. Savers who do nothing, get nothing – have to switch to get a better return on their money.”
“Almost anyone who has money in a checking account, or has a savings account for a year or more, can get a better rate by switching.
“If you have £10,000 in cash and get no interest, you could lose £210 a year by not switching to the best accessible account. Opening an account now only takes a few clicks, which means you can get a decent return for 10 Minutes of switching business accounts.”
What does this mean for your mortgage?
For borrowers, especially those with a mortgage, another increase would be worrisome. The exact effect depends on the type of mortgage you have.
Alice Hein, Personal Financial Expert at BestInvest, said: “With some households already struggling to come to terms with the fact that they are paying nearly 10% more for a basket of goods than they were a year ago, the prospect of higher mortgage rates could be a real turning point for some. .
“Government aid package and emergency measures to support distressed families may gain further impetus when [Chancellor Kwasi] Kwarteng delivers his mini budget on Friday as [he] He pins his hopes on growth, but that doesn’t mean the family’s finances aren’t really stretched to the limit as some people have to budget very carefully just to keep their heads above water.”
So what does that mean to you?
If you are on a mortgage tracker – The increase in line with today’s rise by the Bank of England will be immediate. If your deal is about to expire, it is advisable to look at fixed rate deals to protect you from price hikes in the future.
If you are using a standard variable rate mortgage – These rates (which homeowners return when their initial deals expire and do not return the mortgage) also generally rise in line with the base rate. If you are able to switch, you will get a better price by moving to a new deal, so it may be worth talking to a broker about reselling.
If you are on a flat rate – You will be protected from rising interest rates until your deal expires. About three-quarters of the mortgages have been fixed, so most borrowers won’t see an immediate impact from today’s rally.
If you’re in the early stages of a five or ten-year deal, says Alice, you can relax. But for those whose interest rates are running out, the prospect of higher payments looms.
“If they don’t take any action in the lead up to the expiration date of their current deal, then they need to act very quickly or else they could end up at their lender’s standard variable rate — one of the most expensive forms of mortgage borrowing,” Alice explained.
She added: “Remember that some lenders allow you to lock in a fixed rate for up to six months before the current deal expires – which allows borrowers to go ahead with interest rate increases in the future – so start looking for a new deal now if your current deal expires in the spring. Next “.