Earlier today, the Bank of England decided to hold the base rate at 0.5%. But many top economists reckon it won’t be long before an increase is announced, perhaps as soon as this summer.
The base rate rose for the first time since 2007 in November last year, up from 0.25%. And if the rate goes up again, those with mortgages and other debts are likely to see costs go up, while savers should benefit from higher savings rates.
Let’s take a closer look at the impact of a future rate increase…
Fixed rate mortgages
If you’re on a fixed rate mortgage, your monthly payments won’t change no matter what happens to the base rate.
BUT if the base rate does go up, it’s likely that very cheap mortgage deals could soon be a thing of the past. It’s therefore worth preparing yourself for higher costs once your existing deal comes to an end.
If you have a tracker mortgage, where the rate tracks the Bank of England base rate plus a stated percentage, your mortgage payments will increase if there is a rise in the base rate.
So if, for example, your tracker deal tracks the base rate plus another 2%, you’ll currently be paying 2.50%. If the base rate rises to 0.75%, you’ll be paying 2.75%.
Variable rate mortgages
Variable rate mortgages, including standard variable rates (the rate your mortgage reverts to once your existing deal ends), can change at any time, no matter what happens to the Bank of England base rate.
But if the base rate does increase this summer, it’s highly likely your mortgage repayments will go up too.
Standard variable rates (SVRs) are often very uncompetitive so if you are on your lender’s SVR and you want to shield yourself from higher borrowing costs, it’s worth shopping around to see if you can switch to a better mortgage rate.
A fixed rate could be a good option if want shelter from further rate rises for the term of the deal.
Personal loan rates have remained at record low levels in recent months. In fact, if you’re looking to borrow between £7,500 and £15,000, it’s possible to get rates as low as 2.7% APR representative.
But any increase to the base rate could soon put an end to rates this low.
That said, if you already have a personal loan, you’re likely to be on a fixed rate of interest which means your payments won’t change, even if the base rate does.
If, on the other hand, you’re on a variable rate, your payments are likely to go up following any base rate increase.
Annual percentage rates (APRs) on credit cards have remained at high levels, despite the low base rate.
The good news is, there are still plenty of lengthy low introductory rates available on both balance transfer and purchase credit cards. However, if you’re looking to apply for one, it’s worth doing so sooner rather than later, as many of these deals are already getting shorter.
Always remember to clear your balance before the introductory offer ends and a high rate of interest kicks in.
Record low interest rates have made it virtually impossible for savers to get a decent return on their money, so any increase in the base rate this summer is likely to be welcomed by many.
But while some banks and building societies may push up their savings rates if the base rate rises – as, indeed, some already have following November’s rate increase – they are under no obligation to do so, so you may see no change at all.
Variable rate savings accounts
If you have an easy access account or ISA, which allows you to get hold of your money when you need it, your savings rate will usually be variable. This means that if the base rate rises in the summer, your savings rate may go up too.
But even if interest rates don’t change, there’s nothing stopping you from looking around for a better deal and switching to something more competitive anyway.
Fixed rate savings accounts
If you have a fixed rate savings account or ISA, your interest rate is locked in for a fixed term and will remain the same, despite any increase in the base rate.
If you’re currently thinking about switching to a fixed rate savings account, be wary of fixing for too long as if interest rates do go up, you may find yourself locked into an uncompetitive deal. Often, fixed rate accounts come with penalty charges for taking your money out early.