On 2 August 2018, the Bank of England’s Monetary Policy Committee (MPC) decided to raise the UK interest rate from 0.5% to 0.75%*. It is only the second time in a decade that the Bank has increased the rate (the last time was in November 2017) and it puts interest rates at their highest level since 2009. However, they still remain very low in comparison to those seen before the 2008 financial crash**.
Interest rates affect our finances in many different ways, but the most obvious are mortgage rates and the interest paid on savings accounts. Those in turn have knock-on effects on other aspects of personal finances.
Anyone who has a fixed rate mortgage (around half of all mortgage-holders) won’t be affected by the rise. However, for those who have variable rate arrangements, there will be an increase to monthly payments. According to the Nationwide, the increase means that someone with a £200,000 mortgage will now pay around £299 more per year***.
The interest rates on other forms of borrowing, such as credit cards and some personal loans will also increase as a result.
It usually takes around a month for banks and building societies to decide if they will pass on all or part of the rise. But it may not be good news for all savers - in November 2017, many savings accounts didn’t add on the previous rate rise at all.
For anyone reaching retirement who is considering buying an annuity, the rate rise is good news. Annuity rates are linked to interest rate movements, so that could mean a better deal.
The bigger picture
After two rises in nine months, could this mean a return to interest rates of around 5%, similar to those we saw before the 2008 financial crisis? It is very unlikely. Pressures on household finances, partly driven by slow wage growth, mean that future increases to mortgage and other borrowing costs need to be very carefully considered. However the MPC has suggested that we might see some limited, gradual increases over time****.
The rise in interest rates could be a good time to reconsider your financial plans. Please contact your Brunsdon Financial Adviser if you would like to explore your options.
Please note that this information is for guidance only and does not constitute personal advice. The information provided above regarding interest rates is based on our understanding of current Bank of England and Monetary Policy Committee practice (August 2018), all of which may be subject to change. Brunsdon is not responsible for the content of external web sites.