Interest rate increase: What does this mean for you?

The base rate rise will be keenly felt by households walking a 'budget tightrope', experts have warned, and for those used to years of low rates it could feel particularly pronounced.
The Bank of England  hiked its key interest rate by a quarter-point to 0.75 percent, as it seeks to tame above-target inflation and eyes potential Brexit fallout. Picture; GettyThe Bank of England  hiked its key interest rate by a quarter-point to 0.75 percent, as it seeks to tame above-target inflation and eyes potential Brexit fallout. Picture; Getty
The Bank of England hiked its key interest rate by a quarter-point to 0.75 percent, as it seeks to tame above-target inflation and eyes potential Brexit fallout. Picture; Getty

For many millennials, the base rate rise will be the first taste they have had in their adult lives of a figure above 0.5%.

At 0.75%, the rate is at its highest since 2009.

The move spells rising costs for borrowers, and it comes a week after Office for National Statistics (ONS) figures showed households became net borrowers last year for the first time in nearly 30 years.

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Households across the UK spent or invested around £900 more on average than they received in income during 2017, according to the ONS.

Insolvency Service figures also showed last week that personal insolvencies across England and Wales jumped to a six-year high in the second quarter of 2018.

Phil Andrew, chief executive at StepChange Debt Charity, said: “Whilst a rise in interest rates might be right for the wider economy, from a consumer debt perspective many households are walking a precarious budget tightrope, as their incomes don’t stretch to cover the basics each month.

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“These are the households that a rate rise will affect most. Policymakers mustn’t lose sight of what a rate rise means for real people on a tight budget.”

Many mortgage borrowers will not immediately feel the impact of rising rates, as they are locked into fixed-rate deals, but experts said further rises could limit the number of households accessing mortgage finance, dampening house price growth.According to research from Savills, since 2009 lenders have gradually cut their mortgage rates to bring them close to the base rate.

Savills said: “As a result, mortgage debt is now cheaper than it has been at any point in the last 20 years. If lenders translate the base rate rise directly to their mortgage lending rates, that would still only bring them back to 2016 levels.

“However, this is unlikely to be the last time we see the Bank of England raise base rates.

“As rates rise further, it will become more difficult for households to pass the affordability stress tests they must now take to secure a mortgage. That will limit the number of households able to access mortgage finance, dampening house price inflation.”

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According to trade association UK Finance, 4.7 million regulated home owner mortgages outstanding at the end of 2017 were fixed rates, while 1.3 million were trackers and 1.8 million were standard variable rates (SVRs).

Calculations by UK Finance suggest a 0.25 percentage point base rate rise passed on in full to borrowers could add around £16 to monthly repayments for those on tracker rates and around £12 on an SVR, based on typical amounts outstanding.

Andrew Montlake, director at Coreco Mortgage Brokers, said: “Although on the face of it a rise of just 0.25% is not a massive change, this would still be the highest rates have been since 2009, and with consumers used to a decade of low interest rates it may feel more pronounced than usual.

“For borrowers worried about the rate rise, the important thing is not to panic and to speak to your lender or a professional mortgage adviser straight away if you think there could be any issues.

“It may be that you can lock into a fixed rate sooner than you think, or it may even be worth breaking your current product early, paying the penalties and switching to a new rate, dependent on your circumstances.”

While savers may be hoping for better returns, many accounts have been left unchanged since the Bank of England base rate was increased by 0.25 percentage points to 0.5% last autumn.

Figures from website Savings Champion show the average live easy access account pays 0.42% - an increase of only 0.07 points compared with September 2017 when it was 0.35%.

Mr Montlake said: “It may be that savings rates will change at a much slower pace, if at all, as banks and building societies look to claw back margins and boost profits further.”