Interest Rate is Up. What’s The Impact for Me?
0.5 per cent is the number you need to know.
You may have read that the Bank of England raised the interest rate from 0.25% to 0.50% last week. This is the first rise in 10 years since July 2007. But don’t expect the rate to stay where it is today - even though this first cut is to reverse last’s year emergency rate cut - because experts are expecting further hikes over the next few years. Remember that interest rate was about 5% pre-2008 crisis. And that’s not too long ago.
We wrote about this subject in October already but we feel an update is needed with the latest news.
This rate hike has been instituted to help manage rising inflation better. It will impact you in two main ways: on savings and on loans. A higher interest rate should mean (in theory) that you earn more interest (cash) on your savings and you pay more interest on your loans. But this is all a bit more complicated since providers (banks, savings institutions, lenders, etc.) are not obliged to reflect the change in interest rates since their internal rates also take into account current market conditions. Many providers will in fact reflect the national change, but it is worth checking.
Impact on Savings
This is good news for us consumers. Most of the banks and savings institutions should pass on this rate increase to consumers. Today, ISAs are earning you an average rate of about 1%, so when a bank passes on the interest rate rise, you should be earning 1.25%. When you have £10,000 invested into an ISA, instead of earning £100 you will earn £125 per year. When you have £50,000 invested, it will go up from £500 to £625.
Impact on Mortgages
If you have a fixed-rate mortgage, there will be no impact on you.
If not, check with your provider what your new rate will be. For example, if you have a £200,000 mortgage with an interest of 2%, the 0.25% rise will make it 2.25%. Instead of paying £872 per month you will end up paying £897. If you have a mortgage of £500,000 this will go up from £2,181 to £2,243 (based on 25 years).
You can check on Savvywoman how the rates will change by provider here: https://www.savvywoman.co.uk/12742/whats-happened-to-savings-and-mortgage-rates-since-the-interest-rate-rise/
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