How to prepare for an interest rate rise
It was no surprise that the Bank of England's Monetary Policy Committee (MPC) voted to keep the base rate on hold at 0.50% last month. But, after 24 months of flat interest rates, it's time for borrowers and savers to start preparing for rate increases.
While it's still impossible to say exactly when base rate will begin rising again and how far they'll go up by, it looks almost certain that it will happen this year and a growing number of economists believe the MPC could announce the first base rate increase as early as this week.
So, as it seems just a matter of when and not if the base rate will rise, here are a few things to bear in mind:
A rise in interest rates will mean those on a tracker-rate mortgage or their lender's standard variable rate (SVR) will see a price hike.
If a rate hike would make your mortgage payments unmanageable, it's wise to start looking for a fixed-rate mortgage deal now. There are some competitive deals on the market.
Read our round-up of the best mortgage rates
Prepare for a hike
If you don't want to or can't remortgage, start preparing for the rise. A small rise this year may not affect you much, but if there's a rapid rise you could feel the pinch. Start cutting your outgoings each month and putting a little extra aside.
Time to review your savings
If the base rate rises then savings rates will go with it, so putting your savings in a fixed bond right now may not be the best option. It's advisable to adopt a 'wait and see' approach and keep an eye on what the rates do.
But be warned, when they do start to go up, it may be a slow and steady increase rather than a rapid rise.
Read our round-up of the best savings rates
Every mortgage lender has a standard variable rate of interest, or SVR, on which it bases all its mortgage deals, including fixed and discounted rate and tracker mortgages. When special deals come to an end, the terms of the deal usually state that the borrower has to pay the lender’s SVR for a period of time or pay redemption penalties. The lender’s SVR is, in turn, based on the Bank of England’s base lending rate decided by the Bank’s Monetary Policy Committee (MPC). Every time the MPC raises its rate, mortgage lenders generally increase their SVR by the same amount but when the MPC lowers its rate, lenders are often slow to pass this on or don’t pass on the full cut to borrowers.
Changing mortgages without moving home. Property owners chiefly remortgage to get a better deal but some do so to release equity in their homes or to finance home improvements, the costs of which are added to the new mortgage. Even though you’re not moving house, you still need to engage solicitors, conveyancing and the new lender will require the property to be surveyed and valued.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.