The Bank of England has voted to increase interest rates by 0.25%. So what does this mean for me?
11 July, 2017
Think of interest rates like caffeine. If the economy is sluggish then lower rates can give it a double shot. If the economy is starting to look a bit hyper (and don’t forget the rise in the cost of living is currently a slightly uncomfortable 3%) then an increase in interest rates is like putting it on chamomile tea and calming things down.
As for the recent rise its impact on you obviously depends on whether you’re a borrower, or a saver. Let’s look at mortgages first.
6 out of 10 mortgage holders have plumped for the fixed mortgage deals which have been pretty compelling of late. The average two-year fixed rate for someone with a 5% deposit is 4.3% today. Expect to see these rates rise over the short-term. In fact they have been gradually ratcheting up over the last 6 months as the lenders have been anticipating rate rises. If you are one of the 3.7 million households with a standard variable mortgage then expect to see your monthly payments increase almost immediately.
If you have a mortgage of £100,000 then your payments will likely increase by around £150 a year. A £250,000 mortgage? You’re looking at nearer £380.
Obviously the rates will be passed on via credit cards and personal borrowing. If debt is like fat then the UK is currently bingeing on chips and fried food. The average Brit owes about £8,000 (excluding mortgages) and 25 – 35 year olds are the most indebted. We owe a collective £200 billion – that’s just consumer debt, not companies. So do take a second to look at your credit card debt and prioritise paying off these increasingly expensive borrowings.
Savers will be pleased. The best easy access rate today is 1.3%. Many banks will pass on higher rates to savers but do make sure you shop around – they are not under an obligation too but this is a very competitive market. You should be able to find an easy access account paying about 1.5% and a fixed one year bond paying about 2% once the changes wash through.
The other major impact we can expect to see is on the pound which in turn impacts the stock market. Why? When interest rates go up here, we become a more compelling savings destination for foreign investors. So money tends to flow in and this boosts demand for sterling. Which makes it stronger. The biggest companies in the UK – the FTSE 100 – tend to make the majority of their revenues and profits in foreign markets. For example, Burberry makes more from Asia than from the UK. BP operates in 72 countries. So a stronger pound means that their profits look punier when brought back to the UK and translated into pounds. Which is basically why we’d expect to see a higher interest rate have a depressing effect on the UK stock market.