I feel sick. And you? Last week the Bank of England raised interest rates by 0.75 percentage point to 3% from 2.25%, the steepest rise in 33 years and the highest base rate in 14 years.
The effect this will have on household finances, already crippled by huge energy bills, will be profound.
If you have a mortgage, your stomach is probably already turning. If you are leasechances are your landlord will pass on their higher mortgage costs when they can.
It’s good for savers, but it’s a disaster for anyone in debt. And after 13 years of base rates below 1%, when lenders were effectively giving us all free money, it’s disastrous for almost everyone under 60 (and probably quite a few people in their 60s too).
Here’s what Thursday’s rate hike means for you and your finances.
If you’re on a trailing rate or your lender’s standard variable rate, your monthly payments will increase significantly. A £200,000 mortgage with a term of 25 years sitting on an average SVR of 5.86% means repayments of £1,272 per month.
If the lender increases their SVR by 0.75 percentage points, the mortgage rate rises to 6.61% and the monthly payments increase from £92 to £1,364.
If you’re on a fixed rate agreement, your payments won’t change until you need to remortgage.
At this point, expect them to jump significantly. Data from Moneyfacts shows that the average two-year fixed rate mortgage in November 2020 was 2.29%, making monthly mortgage repayments above £876.
The average two-year fixed rate is now 6.47%, pushing repayments up from £470 a month to £1,346. If lenders pass last week’s rise, which they will, it will likely see the average two-year fix rise to 7.22% and monthly payments to £1,442.
Anyone repaying that same loan will now have to find an extra £566 each month to keep up with repayments.
Credit cards and personal loans
Think of mortgages but much more expensive. Personal loan rates for £5,000 borrowed two years ago would have averaged 7.6%.
The same loan now bears a rate of 8.5 percent.
If you’re on a fixed rate, your payments won’t change, but check the terms and conditions for the fine print that could allow your provider to pass on higher fees.
Moneyfacts figures show the average credit card APR was 25.2% in October 2020; today it is 29.8%.
If you have a 0% deal, you should be safe until the end of that fixed period. Try to pay the balance before this happens.
Banks and building societies have been raising savings rates for some time now, but not as quickly as for mortgages. That said, there are some great deals available.
Al Rayan Bank’s Everyday Saver pays 2.81% with a minimum balance of £5,000. The Yorkshire Building Society Rainy Days Online Account lets you open with just £1 and pays 2.5% up to £5,000 and 2% beyond that. You can only withdraw money twice a year.
Fixed rates are significantly higher, with Oxbury Bank paying 4.65% on its one-year fixed rate bond. A range of providers pay 4.6% and 4.5% on their one-year fixed rates.
Another increase in the base rate should translate into better savings rates. Note that savings rates change daily.
After retirement, annuities allow you to use all or part of your retirement savings to purchase a guaranteed fixed monthly income until your death.
For more than a decade, they were virtually worthless because interest rates were so low. Now they are starting to look more appealing.
Tom Selby, head of pension policy at investment platform AJ Bell, said: “Annuity rates have risen 40-50% this year.
A fund of £100,000 could buy a healthy 65-year-old a single-life annuity paying around £7,684 a year.
The Bank has indicated that this is not the last interest rate hike we will see, so waiting a little longer before locking in could give you more bang for your buck.
The best rates are not linked to inflation, so the payment will buy less each year as the cost of living rises.
Pensions, overdrafts and everything else
Sometimes regulations prevent companies from passing on higher costs to customers and if you are in a guaranteed deal, the terms of your contract will protect you from higher interest rates.
Final salary pension payments – defined benefit pensions – will not change with interest rates, but most will change with inflation, which currently stands at 10.1%.
The Bank is raising interest rates to try to get inflation down to 2%, so there’s an effect, it’s just less immediate.
The watchdog introduced rules a few years ago, effectively capping overdraft fees.
This has led most current account providers to charge a flat 40% interest rate on overdraft accounts. It’s so expensive; pay it if you can. However, the rate will not increase with inflation or interest rates.
Free and confidential help
StepChange Debt Charity: 0800 138 1111
Payment Plan: 0800 280 2816
National debt line: 0808 808 4000
Citizen advice: 0800 144 8848
Debt Advice Foundation: 0800 622 61 51
Turn2Us: 0808 802 2000