Interest rate rise: how will it affect you?
Mortgage holders facing payment hikes as Bank’s rate hits 0.75% - the highest in almost a decade
The Bank of England has increased the UK interest rate for just the second time in a decade, despite a sluggish outlook for the British economy.
Experts had “widely expected” the decision by the Bank’s Monetary Policy Committee (MPC) to lift the cost of borrowing by 0.25% to reach 0.75% - the highest level since March 2009, says The Guardian.
High-street banks use these shifts as a reference point for the amount they pay savers and charge borrowers, so change in interest rates directly affects millions of Britons, explains the BBC.
The broadcaster’s business editor, Simon Jack, says the measure is designed in part to try to control inflation and prevent the cost of living getting higher, along with encouraging people to spend less and save more.
Here is what the interest rate rise may mean for you:
According to figures published by the BBC, around 9.1 million households in the UK have a mortgage, of which more than 3.5 million are on a standard variable rate or a tracker rate.
Owners of standard variable or tracker rate mortgages will feel the effects of the interest rate rise most keenly, as their monthly payments will increase.
The Sun reports that monthly payments on these types of mortgage could “go up by as much as £264”.
Robert Gardner, chief economist at Nationwide, said: “While the impact for most borrowers is likely to be modest, it’s important to note that household budgets have been under pressure for some time, because wages have not been rising as fast as the cost of living.”
The decision to raise the base rate “looks like good news for savers, who have had to live with near non-existent returns on their deposits for some time”, says the Financial Times.
But “in reality, it is unlikely that banks will pass on the benefits to their customers”, the newspaper continues.
Charlotte Nelson, a finance expert at Moneyfacts.co.uk, says: “Today’s rate decision may see some savers jump for joy, as it marks the first positive base rate move in more than ten years. However, savers may want to hold back on the celebration, since the link between base rate and savings rates seems to be severed.”
According to the BBC, any rate rise “might also be good for retirees buying an annuity” - a financial product that provides an income for life.
Annuity rates follow the yields, or interest rates, on long-dated government bonds, otherwise known as gilts.
With the expectation of rising base rates, these yields have also been increasing, giving retirees better value for money when they buy an annuity.
But Richard Eagling, life investments and pensions editor at Moneyfacts.co.uk, warns that “although gilt yields have started to increase in recent weeks, they remain low on a historic basis and the increases have yet to fully feed through to annuity rates”.
He adds: “It will be interesting to see whether any rise in annuity income encourages more retirees to consider the merits of an annuity rather than simply opting for drawdown.”