Five Ways Rising Interest Rates Could Affect Your Finances and How to Overcome It


INTEREST rates are expected to rise as the Bank of England is expected to announce increases before year end.

The Bank of England’s base rate is currently set at 0.1%, the lowest on record in the UK.


How rising interest rates will affect your finances

The record low rate has been in place since March 2020, when the rate fell from 0.25%.

The base rate is used by big banks and lenders who then set their own rates for savings, loans, overdrafts, and credit cards.

The next Bank of England base rate decision meeting is on November 4, and many pundits say that’s when we’ll see a hike.

Laith Khalaf, Head of Investment Analysis, AJ Bell: “The market now expects interest rates to rise by Christmas.

“According to the interest rate markets, there is now an 85% chance of a rate hike this year and a 60% chance of a hike at the next MPC meeting in November.”

If we don’t see a hike on November 4th, it’s likely it will happen at the December meeting or early next year.

The general consensus is that rates will jump to 0.25% but could rise to 0.75% with further hikes in 2022.

Here are five ways a rate hike can affect your finances and what you need to do to prepare:

Higher mortgage costs

One of the most important consequences of a higher base rate is the increase in mortgage costs.

If you bought a variable rate mortgage, your payments will increase when the base rate increases.

Meanwhile, homeowners with fixed rate mortgages will face higher remortgage costs when their current deal ends.

How to beat it

Check the type of mortgage you are on and read the terms and conditions carefully.

If you are on a follow-up mortgage then you can calculate exactly by how much the costs will increase, check your documentation as this should tell you what to expect.

If you have a fixed rate, check when it ends and see if you can find a new deal. It may even be worth remortgage earlier to stay longer, although you may have to pay a fee.

It’s worth considering paying too much for your mortgage if your provider allows it, to free up more of it when rates are low.

More expensive loan

Borrowing is also likely to become more expensive when rates rise. Any existing debt you have shouldn’t be affected, but credit card rates can go up and any new loans or borrowings can become more expensive.

How to beat it

If you have credit card debt, you should try to pay it off before the rates go up.

Transferring your debt to a 0% balance transfer card is a great way to avoid interest and pay off what you owe faster.

If your credit card provider increases their rates, you can reject it and close the account. You should have 60 days to pay what you owe.

If you know you’ll need a loan in the near future, it may be worth acting quickly before rates go up.

Make sure to shop around for the best deal.

Overdraft rates rise

Overdraft rates can also rise if the base rate rises, but experts say that won’t happen overnight.

Usually overdraft interest rates are quite high, usually around 40%, so a rate hike could make things even more expensive.

How to beat it

Overdraft rates are typically double the average rate on a credit card, making it one of the most expensive ways to borrow money.

If you are using your overdraft regularly, you should think about budgeting and see where you can cut it.

If you make a purchase that you know will tip you into the red, it may be worth using a 0% Acquisition Card or a lower interest loan.

Shop around carefully to make sure you pay as little interest as possible.

Better savings rates

Not all rate hikes are bad news, they also mean savers might be able to get a better deal.

Typically, these improvements do not appear right away, and not all banks will pass the best rates on to their savers.

How to profit

If you are planning to get a fixed rate savings account, you may want to wait until the rates go up.

That’s not to say you can’t start saving, just that you should use Easy Access right now, so you can move it to a better rate later.

Some banks will try to attract new customers with attractive rates, so shopping around is very important.

Check if your checking account gives you access to a more attractive savings rate, and also check competing banks, challengers, ISA providers and mortgage companies.

Good for annuities

Interest rate hikes are also good news for anyone considering purchasing an annuity for retirement because they will get a better rate of return.

Unfortunately, if you already have an annuity you cannot switch, so you will be stuck with the rate you bought at.

How to profit

If you want the security of a guaranteed income for life in the form of an annuity, it is definitely worth the wait for the rates to rise.

Since income is set in stone when you buy it, a higher base rate can make a huge difference to how much you will get in retirement.

Martin Lewis reveals how to reduce debt with the new HSBC card that gives you 0% interest for 32 months

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