The era of rock-bottom interest rates could soon be at an end. Expectations are growing that the Bank of England could raise rates as early as next month to tackle rising inflation – a move that could affect mortgage repayments, savings rates and how much of their debts people will be able to pay off.
Interest rates are at a historic low of 0.1% but commentators expect an 0.15% increase in the coming weeks and two additional 0.25% rises next year, bringing borrowing rates back to the 0.75% level seen before the pandemic. Last week, analysts at Goldman Sachs predicted that the Bank would raise rates in November, February and May.
“The big problem is that it is not just this interest rate rise on its own,” says Sara Williams, a debt adviser, campaigner and author of the Debt Camel blog. “Any impact this has on your expenses is in addition to your energy bills going up and rises in food and petrol prices. So an increase to your mortgage that may normally have sounded manageable could be more difficult this winter.”
So how might a rise in interest rates affect you?
People who have borrowed to buy a home or remortgaged have benefited from low rates in recent years. Should there be any change, it will be borrowers on variable-rate loans –estimated to be one in four homeowners – who will feel the immediate effect.
David Hollingworth of L&C Mortgages says that a family with a £200,000 mortgage over 20 years, with a variable interest rate at 3.59%, will pay an additional £15 a month if the rate goes up by 0.15%, as it is expected to next month.
And if it goes up again as predicted by another 0.25% early next year, they will pay an additional £25 a month on top of that. This would mean that the mortgage would cost almost £500 more every year.
While fixed rates are still very competitive, says Hollingworth, some of the lowest offers may soon disappear.
“In the past couple of weeks we have seen major lenders including HSBC, NatWest, Barclays and Nationwide making changes to their fixed deals. The more moves we see, the more likely it is that sub-1% fixed deals could disappear. The five-year rates below 1% are already on the critical list as rate hikes begin to feed through,” he says.
Earlier this month, HSBC increased the rate on a two-year fixed deal from 0.84% to 0.89%, while NatWest increased the same product from 0.88% to 0.93%.
Borrowers who want to take advantage of the low fixed rates still have time. If you are still tied into a deal, an application for a new product may secure the rate for up to six months.
“It is normally best to fix and fix long if you don’t expect to move again soon. It will cost more, but think of it as taking out insurance against future interest-rate rises,” says Williams.
Savers could be forgiven for hoping that a rise in interest rates will result in them finally earning some money after a prolonged period of rock-bottom returns. The reality may be more frustrating, however.
Typically, it takes banks longer to pass on the changes in rates to savers than it does to people who owe them money. Laura Suter of investment firm AJ Bell says the banks are also unlikely to pass on the full rise.
But she adds that while savings rates aren’t going to shoot up overnight, we should gradually see them start to increase. “The best easy-access savings rate at the moment is 0.65% and we should see that increase if rates rise,” she says. “Anyone considering putting their money into a fixed-rate account now needs to think about what they think rates will do in the near future. This is particularly the case for anyone thinking of signing up to a long-term fix. Savers might want to wait to see if a rate hike transpires, and by how much fixed rates rise, before they commit.”
Susan Hannums of Savings Champion says she expects challenger banks, which are eager to get savers’ money, to increase rates, but savers with high street banks will be unlikely to see the benefit of such rises. “These savers need to act now and move their money to a better paying account to not only improve returns but hopefully benefit for any future rise in rates,” she says.
Overdraft rates may also rise, but, as with saving accounts, it is unlikely to happen overnight, says Rachel Springall of the financial information site Moneyfacts: “Many current account providers may wait to increase until a notable brand moves first.”
At a time when other household bills are going up, those with debts on high rates of interest such as credit cards, loans and overdrafts could be badly affected by rate rises, says Jason Hollands of financial advisers Bestinvest.
“If you can start paying these down, the earlier you act, the better, focusing on those with the highest rates to reduce the pain. If that isn’t an option, then it may be possible to move and consolidate your debts to reduce the rate of interest,” he says.
Should a credit card provider raise rates, Williams says consumers can reject the rate rise by stopping using the account: “You can tell the lender that you want to stay on the previous tariff and close the account. You don’t have to repay the full balance immediately and this won’t affect your credit score, provided you make all the repayments on time.” Citizens Advice says that if a credit card company increases the rate, consumers should be given 60 days to reject it and pay off the balance at the existing rate.
The effect of the rate rise will come down to how much other debt you have, she says. “If you are juggling everything to try and make your payments, it may feel as though you are just about on top of your finances, but if your credit card and overdraft balances are going up each month, it’s a good idea to talk to a debt adviser and they will go through all of your options.”