How will a UK interest rate rise affect you?

The Bank of England (BoE) has increased the base rate to 1.75%. This is an increase of 0.5 percentage points, which is the largest single increase for almost three decades and a sign of the struggle to get inflation under control. The last time the base rate was set at 1.75% was during the financial crisis of 2008.

But how will the latest base rate increase affect you and your wallet?

How do interest rate increases affect you?

Increasing interest rates can affect you negatively or positively, depending on your situation and if you have any:

• Borrowing (mortgages, loans and credit cards)
• Savings 

Increasing the interest rate while borrowing money from a lender has the potential to hit you in the pocket, while increasing interest rates while you have capital to save can help your savings grow. Here are the details:

Borrowing

Some types of mortgages charge interest at a variable rate, typically after a fixed-rate interest period has ended. The variable rate charged is highly dependent or even tracks the BoE’s base rate, depending on the specific mortgage type you have.

Therefore, when the interest rate is increased some mortgages become more expensive because more interest is being charged on the capital amount you borrowed. According to data published by the BBC, homeowners on tracker mortgages could be £167 worse off per month, while those on a variable rate will be £132 worse off per month on average.

It might be a good time to check your refinancing options with a mortgage broker!

The same applies to personal loans and credit cards when those products also use a variable rate. If the amount of interest you pay is predominantly decided based on the BoE base rate, you should now expect to pay more.

Savings

On the other hand, the interest rate increase could be good news for people without any borrowing but who are currently saving. The interest rates offered on savings accounts, including ISAs and fixed-rate bonds will increase among high-street and online banks. This means you’ll be paid more monthly or annual interest on your savings pot.

How does increasing interest rates lower inflation?

Increasing the base rate is done to help get inflation under control, which is now estimated to hit 13% later this year. By increasing the interest rate, it encourages people to spend and borrow less, while at the same time it encourages people to save more.

By spending less and saving more, the demand for goods and services decreases, which causes businesses offering goods and services to lower prices to make them more competitive.

How high will interest rates go?

Economists are making predictions on how high the interest rate will need to be set to get inflation back under control. However, the predictions are not uniform with figures between 1.75% and 3.5% being touted.

September 2022