With the Bank of England posting the highest interest rate hike in over 30 years, many of us are already feeling the effect on our finances. But how could it affect you? Read on to find out more
Why are interest rates rising?
The interest rate – also known as the base rate – is set by the Bank of England. It tends to rise to help combat the rate of inflation as it limits borrowing and spending to drive prices down in line with demand. On 3rd November 2022, interest rates rose by 0.75 percentage points to hit 3% – the biggest rise since 1989. And while this might help to curb inflation (which has also reached record heights this year), an interest rate hike means that many people will face higher financing costs and increased loan rates.
But what might this mean for you and your finances?
Higher mortgage payments
A mortgage may be the most substantial debt you have – and your biggest monthly outgoing. While 6.3m of us have fixed rate mortgages and won’t be immediately affected by the interest rate hike, there are 2.2m of us with variable rate mortgages who may now be facing increased monthly repayments.
There are two main types of variable rate mortgage: tracker mortgages follow the base rate while standard variable rate (SVR) mortgages change at the lender’s discretion, although most will also increase their rates in line with the Bank of England.
The exact amount that you can expect your monthly mortgage payment to increase will depend on your initial agreed interest rate and the amount borrowed but, according to finance expert Martin Lewis, you can expect to pay roughly £50 more each month (£600 a year) per every £100,000 of mortgage debt for each percentage point rate increase.
More expensive new mortgages
If you’re looking for a new mortgage, you might find that the rates you’re being offered are much higher than they might have been a few months ago. Whether you’re looking to buy a new property or remortgage as your current deal is coming to an end, it might be hard to find an affordable fixed-rate term. And if you are lucky enough to find one, expect a high interest rate. The average two-year fixed rate home loan increased from 4.74% in September 2022 to 6.65% by October 2022. This type of mortgage will likely remain more expensive than a tracker mortgage for the time being due to the uncertainty of the housing market.
Increased financing costs
If you’re already in debt or looking to take out a new loan, you might find that rising interest rates make your situation harder. The cost of borrowing is rising with the average effective interest rate on credit cards increasing to 18.96% in September 2022. And if you’re struggling to keep up with these rises, you’re not alone; UK Finance data reports that the number of homeowner mortgaged properties repossessed rose 5% in June 2022 when compared to the previous quarter. Don’t be afraid to contact your lender as soon as you start to struggle, you might be able to come to an agreement that helps you make some payments and avoid repossession.
Improved savings
The last few years have seen savings accounts dip due to low interest rates but the one silver lining to an interest rate hike is that your savings could start working a lot harder. If you already have a bank account that pays interest or you’re considering adding more money into your savings, you could now see a better return than you may have done a few months ago.
Difficult times for businesses
If you’re self-employed or own your own business, you might find that the interest rates hikes lead to reduced demand for goods and services. The increased cost of credit may make people more reluctant to reach for their credit card when shopping and those with savings might choose to leave them untouched to earn interest rather than spend. You may also find that it now costs more to borrow from lenders for your business and that suppliers’ prices also rise.
How to cope with interest rate rises
Interest rate hikes impact everyone’s finances, but there are steps that you can take to make the increases easier to handle. If you can, putting a financial plan in place that takes rate rises into account can make it less of a shock when your monthly ongoings start to increase.
You may also want to take steps to improve your credit score. While it can take time to boost your score; registering on the electoral roll, regularly checking your credit report, and keeping your credit utilisation low could all help you qualify for better interest rates in the future.
If you currently have a fixed rate mortgage that’s set to end soon, you could consider overpaying while the rate is still low. This is only an option if you have disposable income available, but it could help keep your future repayments manageable when your deal finishes.
Finally, remember that you don’t have to be struggling with money to seek debt help and advice from an experienced debt advisor. They can help you make a workable budget and assess your outgoings before you get into financial difficulty, as well as helping you find the right debt management solution for you if you are falling behind with payments.
If you’re looking for debt advice, our friendly team of experts at My Debt Plan are here to help. Give us a call on 0161 8260 585 or send a message here.
