On Thursday 2nd November 2017, the Bank of England Monetary Policy Committee raised interest rates for the first time since July 2007, increasing the Bank Base Rate to 0.50%. It said it had raised the rate in a bid to curb inflation, but what are the effects of an interest rate increase on your day to day finances.
If you’re on a “tracker” rate then your interest rate should rise. On a mortgage of £100,000 this equates to an increase of approximately £250 p.a.
If you have a mortgage linked to your own bank’s “standard variable rate” (SVR), the rate is set by the lender and whilst the rate is likely to go up, there is no guarantee the increase will be passed on to borrowers. Whilst SVRs tend to be loosely linked to the Bank Base Rate, there are essentially set at the bank’s discretion, so your bank may decide to pass on the increase, part of it or none of it at all.
Finally, if it’s a fixed rate deal you would not see any immediate change as your interest rate is fixed, for whatever term you tied into with your mortgage. That said, if your mortgage term is up soon you may find rates for new deals have increased.
For savers the interest rate increase is good news, as if you’ve got cash in the bank you will already be painfully aware of the derisory rates on offer for cash deposits.
On a deposit of £10,000, if the rate rise is fully passed on, you would earn an extra £25 p.a. in interest before tax. But don’t forget, if you’ve got a fixed rate account then your interest rate will be guaranteed until the end of the term and will not benefit from the interest rate rise.
If you are close to taking your pension benefits and decide to secure an income via the purchase of an annuity, then there may be an impact.
Annuity rates follow the yields (or interest rates) on long-dated government bonds, otherwise known as gilts. With the increase in the Bank Base Rate, these yields are likely to rise; giving retirees better value for money should they buy an annuity. Please note that annuities are not the only way to access your pension benefits and you should seek professional advice when considering taking pension benefits.
Will there be another rise?
This is the question on everyone’s mind. Bank of England Governor Mark Carney said “The Monetary Policy Committee continues to expect that any future increases in interest rates would be at a gradual pace and to a limited extent.”
With inflation having recently hit 3%, which is above the bank’s 2% target, increasing interest rates is one of the measures which the Monetary Policy Committee could implement, however, it first remains to be seen how the economy will react to the recent rate rise.
If you would like to discuss the new legislation regarding interest rate increases, or you would like to speak with a member of our team, please contact Gareth Davies or call 01772 821021 to be put in contact with a member of our Financial Planning team.