The Bank of England has raised the interest rate from 0.5% to 0.75% – the first rise since 2009.
Given that length of time, it’s unlikely that you’ve missed the news, but do you know what this rise means for your own finances and how to make the most of the Bank of England’s decision?
Your borrowing may cost more
If you’re considering applying for any other sort of borrowing, you’ll want to get your application in early. With the interest rate rising, it’s almost certain that lenders will be passing those extra costs on to customers.
Credit cards, loans, and even mortgages – if you pay back with interest, you’ll be paying back even more after this interest rate rise.
For instance, Nationwide Building Society has suggested that if you have a £200,000 standard variable rate (SVR) mortgage, you’ll end up paying out an extra £299 a year. If you do have an SVR mortgage, it’s worth looking at moving to a fixed-rate variable mortgage; one that won’t fluctuate over time.
Savers could – technically – benefit
Savers are the group most likely to celebrate the interest rate increase. As it stands, for every £1,000 you have stashed away in savings, you stand to earn an additional £25 a year – which might not sound like much, but it certainly adds up.
More to the point, interest rates for most savings accounts are drastically low these days, so any extra dosh is likely to be welcomed.
However, the problem is that some banks don’t always pass those rate rises on to their customers, so even with an increase in interest rates, you might not get anything for it.
And if that’s the case, now’s the perfect time to hunt around for a savings account that will offer you a better deal.
It’s good news for pensions
If you’re a pensioner considering purchasing annuities – a sort of pre-paid annual income – then you could see a little extra. The rates for annuities are tied to the interest rates of gilts, or government bonds.
With the increase in interest rates, there’s a good chance that annuities will also rise. According to industry insiders, a 1% rise in gilts translates to around an 8% rise in annuities.
Mind you, it’s worth pointing out that annuities are a long-term investment; £100,000 works out to an income of around £5,000.
So, what’s the upshot
How you react to news of the interest rate rise depends largely on whether you’re a borrower or a saver. Traditionally, borrowers have suffered from any increase, while savers have earned more on their money.
However, in recent times, that hasn’t necessarily translated into the real world. True, those with credit lines will almost certainly expect to pay more for their borrowing.
However, savers aren’t guaranteed the sort of benefits that any rate rise should give them, with banks often refusing to pass on the gains.
In short, it may well be the ideal moment to readdress your budget to ensure you’re not paying more than you can afford. If that means switching accounts or opening new ones to make your money continue to work for you, now is the time to do it.