As the cost of living crisis continues to have an impact on British households, you could be spending more time worrying about money than usual.
Indeed, inflation reached 9% in May 2022, reflecting the rapidly rising costs of goods and services around the UK. As a result, the Bank of England (BoE) raised the base rate of interest to 1.25% in June, in an attempt to curb public spending and slow the rate of inflation.
In fact, the BoE has raised interest rates five times since December. The base rate has been increased from a historic low of 0.1% to a 13-year high of 1.25% in five successive jumps between December and June.
What’s more, according to The Times Money Mentor, experts predict the base rate could reach 2% by the end of the year.
While you may have been focused on how inflation could affect your money, it is important to understand how a steady increase in interest rates could also have a significant impact on your finances.
Read on to find out how rising interest rates could affect your mortgage, savings, and investments this year.
1. Your mortgage repayments could become more expensive
The effect of rising interest rates on your mortgage depends entirely on the type of mortgage you have.
If you have a tracker-rate mortgage, the interest you pay rises and falls directly in line with the base rate. So, while you may have benefited from lower repayments during the pandemic, you may have also seen your monthly repayments creeping up as the BoE slowly increases the base rate.
A 0.25% increase on a £300,000 repayment mortgage over 25 years adds around £37 a month to your repayments (calculated using the Which? mortgage calculator). So, several more hikes in the rate could see your repayments rise significantly.
Similarly, a variable-rate mortgage could result in higher repayments this year, too. However, unlike a tracker-rate mortgage, interest rates on your variable-rate mortgage are set at the discretion of your lender. Your lender may have chosen to pass on the base rate increase to borrowers, but this is not always the case.
Of course, if you have a fixed-rate mortgage, your repayments will not have changed as the base rate rises. However, if you’re coming to the end of your fixed term, you could experience higher repayments when you renew your deal with your current lender, or switch to a new provider.
2. Your cash savings might experience positive returns
Your savings accounts could have seen somewhat negligible returns during the pandemic, as the base rate was lowered to 0.1% to encourage spending.
So, in positive news, your cash savings might rebound this year as interest rates rise.
According to Moneyfacts, as of 15 June 2022, the best easy-access savings account available has an interest rate of 1.52%. While this may be an improvement from the low interest rates experienced during the pandemic, when compared with 9% inflation, your cash savings may still take a hit this year.
For example, if you put £50,000 in an easy-access savings account with a 1.52% interest rate a year ago, you would now have £50,760.
However, £50,000 of goods and services a year ago would now cost, on average, £54,500. Simply put, your savings have lost value in real terms.
So, while your cash savings might see positive returns as a result of higher interest rates, it could still be constructive to explore investment options, too.
3. The value of your investments could fluctuate
One of the key reasons the BoE is raising interest rates is to dampen consumer spending, and slow the rate of inflation. However, diminished consumer spending can have a knock-on effect on share prices if companies are not as profitable. This could affect the value of things like pensions and investments.
In addition, rising interest rates often improve the value of sterling, which means that your international investments could experience a temporary price dip. On the other hand, British companies may fare better in times of high interest.
So, although past performance is not a reliable indicator of future performance, the value of your investments could be affected in the short term by rising interest rates. In this instance, it is important to remember that markets usually rebound, so panic-selling may not be a wise choice if your investments do not perform well this year.
The performance of your portfolio in a time of rising interest will depend on the diversity of your investments, as well as other affecting factors that contribute to market values. To learn how rising interest rates could affect your portfolio specifically, it is important to discuss your unique circumstances with your financial planner.
Get in touch
Seeing as interest rates are predicted to rise further in the coming months, it may be beneficial to discuss the effects with your financial planner.
We can examine the areas of your personal finances that may be most affected, and provide you with peace of mind and confidence during a time of economic volatility.
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The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.