With the Bank of England posting the biggest interest rate hike in over 30 years, many of us are already feeling the effects on our finances. But how could this affect you? Read on to find out more
Why are interest rates rising?
The interest rate – also called the base rate – is set by the Bank of England. It tends to rise to help fight the rate of inflation as it limits borrowing and spending to lower prices based on demand. The 3rd In November 2022, interest rates rose by 0.75 percentage points to 3% – the biggest rise since 1989. And while that may help curb inflation (which has also reached record highs this year), a rise in interest rates means that many people will face higher financing costs and higher lending rates.
But what could this mean for you and your finances?
Higher mortgage payments
A mortgage can be the biggest debt you have – and your biggest monthly expense. While 6.3 million of us have fixed rate mortgages and will not be immediately affected by rising interest rates, 2.2 million of us have variable rate mortgages which could now cope with an increase in monthly repayments.
There are two main types of variable rate mortgages: trailing mortgages follow the base rate while standard variable rate (SVR) mortgages change at the discretion of the lender, although most also increase their rates in accordance with the Bank of England.
The exact amount you can expect your monthly mortgage payment to increase will depend on your original agreed interest rate and the amount borrowed, but according to financial expert Martin Lewis you can expect to pay around £50 of plus each month (£600 per year). ) for every £100,000 of mortgage debt for every percentage point rate increase.
New, more expensive mortgages
If you are looking for a new mortgage, you may find that the rates available to you are much higher than they were a few months ago. Whether you’re looking to buy a new property or mortgage as your current contract comes to an end, finding an affordable fixed rate term can be difficult. And if you’re lucky enough to find one, expect a high interest rate. The average two-year fixed rate home loan has fallen from 4.74% in September 2022 to 6.65% in October 2022. This type of mortgage will likely remain more expensive than a trailing mortgage for the time being due real estate market uncertainty.
Increase in financing costs
If you are already in debt or looking to take out a new loan, you may find that rising interest rates are making your situation more difficult. The cost of borrowing is increasing with the average effective interest rate on credit cards rising to 18.96% in September 2022. And if you’re struggling to keep up with these increases, you’re not alone; Data from UK Finance reports that the number of properties mortgaged by repossessed owners increased by 5% in June 2022 compared to the previous quarter. Don’t be afraid to contact your lender as soon as you start having trouble, you may be able to come to an agreement that will help you make some payments and avoid repossession.
Over the past few years, savings accounts have fallen due to low interest rates, but the only benefit of higher interest rates is that your savings might start working a lot harder. If you already have a bank account that pays interest or are planning to add more money to your savings, you might see a better return now than you did a few months ago.
Tough times for business
If you are self-employed or own your own business, you may find that increases in interest rates lead to lower demand for goods and services. The rising cost of credit may make people more reluctant to use their credit card when shopping, and those with savings may choose to leave them intact to earn interest rather than spend. You may also find that it is now more expensive to borrow from lenders for your business and supplier prices are also increasing.
How to deal with rising interest rates
Interest rate increases impact everyone’s finances, but there are steps you can take to make the increases more manageable. If you can, having a financial plan in place that accounts for rate hikes can lessen the shock when your monthly expenses start to rise.
You can also take steps to improve your credit score. Although it may take time to increase your score; registering to vote, regularly checking your credit report, and limiting the use of your credit could all help you qualify for better interest rates in the future.
If you currently have a fixed rate mortgage that is due to expire soon, you might consider overpaying while the rate is still low. This is only an option if you have disposable income, but it could help you manage your future repayments once your transaction is complete.
Finally, remember that you don’t have to be struggling with money to seek help and advice from a experienced debt advisor. They can help you build a workable budget and assess your spending before you run into financial difficulties, as well as find the right debt management solution for you if you’re behind on your payments.
If you’re looking for debt advice, our friendly team of experts at My Debt Plan are here to help. Call us on 0161 8260 585 or send a message here.