What does the second rise in interest rates in 10 years mean?
Base rate up by 0.25%
The Bank of England has just increased the base rate from 0.5% to 0.75% (2nd August 2018) catching a few commentators by surprise. What’s the likely impact?
The dominant chatter I am hearing is the usual complacent stuff we get from the financial establishment. Basically it is “steady as she goes”, “nothing to worry about”, “everything is under control”.
According to the BBC’s Business Editor Simon Jack, there is “no” chance of us going back to rates of 5% plus which existed before the financial crisis.
The experts typically expect no more than two 0.25% increases from now to 2020.
Experts usually completely fail to predict financial crises.
Should you be worried?
Some 9.1 million households have a mortgage in the UK. Of those about 4.7 million are on fixed rates for a fixed number of years, often from 2 to 5 years.
If you are on a fixed rate you are unlikely to be affected by the increase until your fixed rate ends.
3.5 million households are on a standard variable or tracker rate. If you are on one of these types of mortgages you are likely to see an increase in your mortgage payment depending on your lender and your level of borrowing.
- Someone who has borrowed £200,000 and is paying a monthly mortgage of £1089 at present is likely to see an annual increase of £299 in mortgage payments.
- Someone who has borrowed £125,000 and is paying a monthly mortgage of £625 at present is likely to see an annual increase of £187 in mortgage payments.
These increases are not earth shattering but it is important to remember that a rise in the base rate is likely to push up all borrowing, not just mortgages.
Interest on loans, credit cards and store cards is likely to increase. Further, higher interest rates can push up prices. Those households finding it difficult now may be pushed over the edge.
Rate rises are a negative signal to all sectors and players in the economy.
How should you respond?
Overall, there is no obvious cause for immediate alarm, but it would be unwise to:
- Underestimate the overall impact of the rate rise
- Carry on spending at the same levels as before
- Fail to carefully assess your mortgage options now and going forward
- Assume the experts are right in thinking that interest rates and inflation are pretty much under control for the foreseeable future.
History tells us that economic crises are invariably unexpected, following on from some major event that sets the pack of cards tumbling.
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Major events which present high risk to the UK in the foreseeable future include:
- Hard or no Brexit
- US-China trade war
- Worldwide stock market crash
- Housing crash
- Global political flashpoint.
The prudent approach going forward is to have your eyes wide open and proceed with caution.
Reduce your non-essential spending and look at ways to increase your income.
If you are in the happy position of having savings, the rate rise should theoretically boost your savings rates.
However, you should not expect anything spectacular; after the last rate rise in November of last year, many banks and building societies did not increase their savings rates at all.
What do you think will happen to interest rates going forward? Pease leave your comments below.
Rebel Property Coach
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