Understanding your energy usage
Inflation rose again in October, up to 4.2%. This is the highest level in nearly 10 years, and it is hitting household finances hard.
It’s also likely to rise again before too long.
At the same time, with talk of a base rate rise – potentially before the end of the year – you need to be prepared. If rate rises are lurking around the corner, this will be bad news for borrowers, as it will come hand-in-hand with increasing household bills – and a squeeze on finances this winter.
Now is the time to take steps to protect your finances.
In recent weeks, we’ve seen signs of improvement in the savings market, but right now, it’s very hard to find a standard account which can beat the eroding power of inflation.
The best easy access account is currently only paying 0.67%.
If you’ve got money squirreled away, the best approach is to shop around to seek out the very best rates you can.
Some of the top rates are on fixed-rate bonds, but to get more than 2%, you need to be prepared to lock your money away for five years. To get more than 1.75%, you need to lock your cash up for three years.
The problem with tying your money up for too long is that any increase in the base rate could translate into higher rates in this market.
One compromise might be to fix for just a year. At present, you can get just over 1.5% on a one-year fix. At the end of this period, there’s a good chance rates will be higher for when you’re ready to fix again.
If the base rate does go up, variable-rate savings accounts would usually be the first to see rate increases, but be wary about waiting for this to happen, as some banks may be slow to pass on improvements, and some may choose not to do so at all. It’s worth checking for the best deals now and making a switch.
If you’re looking for better returns, you might be giving some thought to investing.
But you need to tread very carefully, as it does come with some risks.
While a stocks and shares ISA (where you can hold investments free from tax) offers the potential for more attractive returns, investing can be volatile on a day-to-day basis.
You need to research carefully so you understand what you’re getting into. You also need to be prepared to take a long-term view – investing for a minimum of five years to give your cash the best chance to grow.
This is not a decision to take lightly.
Most consumer borrowing is fixed, and while credit card costs can go up, they are not necessarily linked to the Bank of England’s decision. That said, it’s prudent to be braced for higher costs, and especially if the rate charged by lenders is variable.
If you have debts on cards, personal loans or an overdraft, work hard to pay these down now while rates are low.
List out all your debts, from the most expensive to the cheapest, and prioritise paying off the most costly one, before moving down the list. But always check for any penalties first.
If you’re looking to consolidate your debts into better deals, the right option will depend on how much debt you have, and the rates you’re currently paying.
If you have debts on a number of cards, you may find that switching to a card charging 0% on balance transfers makes good sense. Some providers are currently offering more than 20 months interest-free. But remember you need to clear what you owe before the 0% deal comes to an end, or interest charges could rocket.
Alternatively, switching to a low-rate loan could give you the certainty you need amid the prospect of rising interest.
If you’re looking to remortgage in the near future, you should consider comparing deals and securing a fix now (if the Bank of England raises the base rate, variable-rate mortgages will go up).
Equally, once lenders believe rises are on the way, fixed mortgage rates will start edging up ahead of any announcement.
As mortgage deals are often valid for a number of months, it makes sense to start searching for a fix sooner rather than later.
With rates currently at rock-bottom, now is a good time to see if you can make overpayments on your mortgage – especially if you’ve built up a bit of a nest egg over lockdown.
This could save you a substantial amount in interest charges.
Typically, lenders will allow you to overpay up to 10% of your remaining balance each year on your home loan without facing a penalty, but check the T&Cs.
As an added incentive, if you overpay, you may be able to get a more competitive deal when you come to remortgage, as your balance will be lower.
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