Interest rate hike: Winners and losers revealed as BoE poised to change rates

Bank of England: Victoria Scholar discusses interest rates

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If they do it will have wide-ranging impacts on peoples’ finances however it is still uncertain what the outcome of tomorrow’s meeting of the nine-person Monetary Policy Committee will be. In a recent survey of investors by Hargreaves Lansdown 82 percent believed rates will be higher in a year but only a third thought they would be higher in six months. The question seems very much not if but when, although the Bank of England’s chief economist Huw Pill previously commented November’s discussions would be “live”. If rates go up the first likely increase would be to move from 0.1 percent to 0.25 percent then up in increments of 0.25 percent thereafter. But what does that actually mean in real terms? Express.co.uk runs through some of the winners and losers:

Mortgage holders

Perhaps the most immediate impact of a rate rise will be on mortgages.

Those on variable tariffs will see their interest rates go up overnight whilst deals for new applicants will also become less competitive.

If rates go up by 0.15 percent someone with a £250,000 mortgage at the current average variable rate of 2.45 percent would see their repayments rise by £228 a year.

Were interest rates to reach 0.5 percent the same borrower would find their costs rise by £612 a year.

The bigger a person’s mortgage debt the higher the impact with someone with £450,000 of borrowing at current average rates seeing an annual extra cost of £1,104 if interest rates reached 0.5 percent.

The only sure way to guard against rate rises is to try to get a fixed deal while rates are as low as possible.

Head of personal finance at AJ Bell Laura Suter said: “if you fix your mortgage now you’ll lock in current low rates and avoid an interest rate rise.

“Mortgage companies have already started to increase their rates, and they’ll rise again once a rate rise actually happens.

“Someone with £250,000 of borrowing on the average variable rate mortgage now could save £2,088 a year by switching to the current top two-year fix.

“If rates rise to 0.25 percent they would save £2,316 a year.”

A rate rise would also be bad news for first-time buyers looking to take out their first mortgage.

According to Defaqto last week the average rate for a two-year fixed first-time buyer mortgage at 95 percent LTV was 2.45 percent but this has already jumped to 2.69 percent in anticipation of a rate rise tomorrow.

While these numbers may seem small, they will add around £24 to a monthly repayment for someone with a mortgage for £200,000.

Savers

In an era of rock bottom interest rates savers have grown used to disappointing returns on their cash and may be looking to a rate rise for relief.

While in theory a higher base rate could lead to better returns on bank accounts it’s not to be taken for granted.

Sarah Pennells, Consumer Finance Specialist at Royal London, warns “there’s no guarantee that the interest rate on variable rate savings accounts will rise straight away, so savers should keep a close eye on their own rate”.

“In the event of a rate rise, other banks or building societies may offer a better return.”

A recent survey but Hargreaves Lansdown found 41 percent of people have no idea what they’re actually earning on their savings so it’s important to check and compare with other competitors.

Another factor to consider is whether savings rates may go up further still if the Bank of England carries out further rate rises.

This is particularly important when considering whether to put savings into an account with a fixed deal.

Ms Suter explains: “If you have £10,000 saved and put it in the top two-year fix now you’d have made £355.10 interest at the end of the two years, but if you wait and Base Rate (and savings rates) rise by 0.15 percentage points, you’d make an extra £30 in interest.

“If Base Rate rises to 0.5 percent and all that gets passed on to savings rates you’d make an extra £102 in interest at the end of the two years.”

Pensioners

Annuity rates have recently hit a two-year high with a 65-year-old with a £100,000 pension able to get an income of £5,099, up £99 on last year.

However an interest rate rise could push annuity rates even higher boosting pension income.

Annuity income comes from Government bonds which produce a fixed income so if their price rises it becomes more expensive to buy that income.

If interest rates rise though investors typically sell their government bonds leading to the price falling.

As a result it becomes cheaper to buy a fixed income and so annuity rates tend to rise.

As with savings further gains may be possible if future rate rises happen.

Senior pension and retirement analyst at Hargreaves Lansdown Helen Morrissey said: “If you’re worried about getting the timing right, and rates rising after you’ve locked in an income, remember that you don’t have to annuitise all at once.

“You can buy an annuity with part of your pension pot in order to make sure the essentials are covered, and then when you’re older and possibly qualify for a better rate, you can consider buying another annuity with another slice of your pension pot.”

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Those in debt

Like with mortgages, lenders will be very quick to pass on interest rate rises to those currently in debt.

Personal debt has increased considerably since the pandemic with charity StepChange estimating around £360 million in rent debt was built up during this time.

Financial planning expert at Quilter Heather Owen said: “Universal Credit claimant numbers are likely to rise if there is a rise in rates and people fall further into debt, particularly alongside the current hike in living expenses.”

AJ Bell head of personal finance Laura Suter advises: “Anyone with debt needs to work out if they can switch it to cheaper borrowing, and get in quick before rates do rise.”

“Look at whether you can transfer credit card borrowing on a 0 percent balance transfer deal, or see if you’re eligible for an interest-free overdraft.

“After that, people should list out their debt from the most expensive to the cheapest, regardless of the amount owed on each one, and prioritise paying off the most expensive before moving down the list.”

The pound

A rise in interest rates could potentially see a rise in value of the pound due to hot money flows where capital from abroad moves in to take advantage of the difference in rates.

Head of Investment at Interactive Investor Victoria Scholar said: “There’s potential for a major positive knee-jerk reaction in GBPUSD with upside potential towards $1.38 or even $1.40 if the balance of votes leans in favour of a hike.”

This would make the pound more valuable for anyone exchanging into a foreign currency such as holidaymakers.

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