Are you ready for an interest rate rise?

It’s been a decade since the last increase in the Bank of England base rate, but we could see one next month

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Speculation is mounting that the Bank of England will raise its base rate on 2 November.

The base rate influences mortgage and savings accounts rates, so any increase could have an impact on your family finances.

At the moment, the base rate stands at an all-time low of 0.25%. Mark Carney, the Bank’s governor, has talked in recent weeks about the need for a rate rise, and experts think it might creep up to 0.5%, or even 0.75% when the next scheduled announcement is made.

Carney is worried about inflation, which is heading towards 3% (his target, given to him by the government, is 2%). Increasing the cost of borrowing would dampen demand across the economy, making it harder for suppliers to push through price hikes.

But let’s come back to how a base rate increase would hit your pocket…

Savings accounts

Savers have been craving an increase in interest rates for years, although the mooted rise to 0.5% or even 0.75% wouldn’t make a massive difference to most people.

This is especially the case as banks and building societies are under no obligation to raise their savings rates by the same amount as the Bank of England, or to even raise them at all.

Say you have £1,000 in a savings account or ISA earning 1.25% - that’s £12.50 a year in interest. If the bank matches a 0.25% increase in the base rate, it will then be paying 1.5%, so you’ll get £15 interest - a rise of £2.50.

With a 0.5% rise, your interest would be £17.50 - a fiver more than at present.

But savers will at least be heartened by the direction of travel that rates have taken. You should certainly keep a close eye on the rate you’re getting - and if your savings institution fails to increase rates following the base rate decision, you should switch to an account elsewhere that is paying more.

Rates remain painfully low, so it’s vital to squeeze maximum returns out of your savings.

Fixed rates

That said, if you’re on a fixed rate product such as a savings bond, you should probably stay put rather than chase a higher rate elsewhere because of the penalties you would face for withdrawing your money early.

Hopefully the rate you’re getting on a bond still looks attractive even after the shift in the base rate.

One option everyone should consider is switching to a current account which either pays a healthy rate of interest or which offers a meaty cashback incentive to switch.

If you can earn, say, £150 in hard cash switching current account, that’s the equivalent of a year’s interest on £10,000 at 1.5%.

Mortgage costs

While savers would benefit from a base rate rise, the opposite would be the case for many mortgage borrowers.

It’s worth noting that personal loans, which are not secured against a property in the same way as a mortgage, are usually fixed rate deals, so they won’t change, regardless of what happens to the base rate.

Anyone with a tracker mortgage - where the interest rate is directly linked to the base rate and matches any rise or fall - would see their costs rise almost as soon as the Bank announced an increase at noon on 2 November.

Those with variable rate deals might see their rate edge upwards in the next few weeks.

Those with fixed rate mortgages would not see any change during the period of the fix, but they would need to watch out when the fix came to an end - they could find themselves moving onto a relatively expensive variable rate deal.

Need mortgage advice?

Anyone faced with rising mortgage costs could consider switching to a cheaper deal, having looked at what is available.

But this is not always an easy calculation to make given the various fees that would eat into any savings achieved by locating a lower interest rate.

That’s why expert help is important. We’ve linked up with specialist mortgage broker London & Country, who will talk you through your options having reviewed all the mortgage deals on the market.

You can call them free on 0800 170 1943, and they’re there seven days a week.

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