What Will The Interest Rate Rise Mean For You ?

02/11/2017

The rise in base rates will produce both winners and losers, reports BBC online.

The winners will include 45 million savers, who are likely to see higher returns from savings accounts. A number of providers have already announced they will be increasing savings rates in line with the rise.

Those planning on buying an annuity to finance retirement income will also benefit.

But for at least four million households with variable rate mortgages, monthly payments are set to rise immediately.

Variable rate mortgages

Across the UK, 9.2 million households have a mortgage.

Of these, around half are on a standard variable rate (svr) or a tracker rate, amounting to between four and five million households.

These are the people who will be most affected, as their monthly payments will increase.

Change on variable rate mortgages
Outstanding balance current monthly payment   increase
£50,000 £225 £6
£100,000 £450 £13
£150,000 £675 £19
£200,000 £900 £25
£250,000 £1,125 £32
£300,000 £1,350 £39
Source: UK Finance    
Base: current mortgage rate 2.53%   25 year term

Fixed rate mortgages

The vast majority of new mortgage loans – 94% – are on fixed interest rates, typically for two or five years.

Currently half of all outstanding loans are on fixed rates, equating to around 4.5 million households.

Borrowers will see no immediate rise, but when such borrowers reach the end of their term, they may find they have to make higher monthly payments.

Savers

The average easy-access savings account is currently paying 0.14% in annual interest, according to the Bank of England. So someone with £10,000 worth of savings is earning £14 a year. If the rate rise is fully passed on, they would earn an extra £25 a year, making £39 in total.

A saver with £10,000 in a typical cash Individual Savings Account (ISA) would see their income rise from £30 a year to £55.

Following the Bank’s decision, Nationwide, TSB and Yorkshire Banks have promised to increase their variable savings rates.

Mark Carney, the Bank’s governor, said he expected other providers to follow suit.

“We do expect it to be passed on,” he told reporters.

One problem in recent years has been that banks and building societies have been able to borrow money from the Bank of England very cheaply, so they haven’t needed to compete for deposits from savers.

Annuities

The rate rise is also good for retirees buying an annuity – or income for life.

Annuity rates follow the yields – or interest rates – on long-dated government bonds known as gilts.

With the expectation of rising base rates, these yields have also been rising, giving retirees better value for money when they buy an annuity.

Back in November 2011, a 65 year-old buying a joint annuity for £100,000 would have got an annual income of £5,404. Last year that had dropped by £1318 to £4086.

However this month the figure has risen back to £4468.

Depending on how the market views the likelihood of further base rate rises, annuity rates may continue to creep up. But we are still a long way from the heady days of the 1990s, when a £100,000 pension pot would have bought an annual income of around £15,000 a year.

 

If you would like more information on how the rate change could affect you, please contact us >>

 

 
Written by Colin Caulfield | Director

Colin is a Chartered Financial Planner & Pension Adviser Of the Year Read more >>

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