I feel sick. And you? Last week, the Bank of England raised interest rates by 0.75 percentage point, from 2.25% to 3%, the steepest rise in 33 years and the highest base rate in 14 years.
The effect this will have on the finances of households, already affected by huge energy bills, will be profound.
If you have a mortgage, chances are you already have a queasy stomach. If you are rentalyour landlord will most likely pass on your higher mortgage costs when they can.
It’s fine for savers, but it’s a disaster for anyone with debt. And after 13 years of sub-1 percent base rates, when lenders effectively gave us all free money, that’s dire for just about anyone under 60 (and probably quite a few 60-somethings, too).
Here’s what Thursday’s rate hike means for you and your finances.
If you have a tracking rate or your lender’s standard variable rate, your monthly payments will increase significantly. A £200,000 mortgage with a term of 25 years with an average SVR of 5.86% means repayments of £1,272 per month.
If the lender increases your SVR by a full 0.75 percentage points, the mortgage rate reaches 6.61 per cent and the monthly payments increase from £92 to £1,364.
If you have a fixed rate offer, your payments won’t change until you need to remortgage.
At that point expect them to jump significantly. Moneyfacts data shows that the average two-year fixed-rate mortgage in November 2020 was 2.29 per cent, making monthly mortgage payments in excess of £876.
The two-year average fixed rate today is 6.47 per cent, which increases repayments by £470 per month to £1,346. If lenders pass last week’s increase, which they will, the two-year average settlement is likely to rise to 7.22 per cent and monthly payments of £1,442.
Anyone remortgaging that same loan will now have to find another £566 each month to keep up with payments.
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 per cent.
The same loan today has a rate of 8.5 percent.
If you have a flat rate, your payments won’t change, but check the terms and conditions for fine print that might allow your provider to charge higher charges.
If you can pay off any outstanding debt with a credit card, do so. Credit card interest charges are almost always variable and providers have been passing on higher charges throughout the year.
Moneyfacts figures show that the average credit card APR was 25.2 percent in October 2020; today it is 29.8 percent.
If you have a 0 percent offer, you should be safe until that fixed period ends. Try to pay off the balance before that happens.
Banks and building societies have been raising savings rates for a while now, though not as fast as they have on mortgages. That said, there are some pretty good deals available.
Al Rayan Bank’s Everyday Saver pays 2.81 per cent with a minimum balance of £5,000. Yorkshire Building Society’s online rainy day account lets you open with just £1 and pays 2.5 per cent up to £5,000 and two per cent above that. You can only withdraw money twice a year.
Fixed rates are significantly higher, with Oxbury Bank paying 4.65 percent on its one-year fixed-rate bond. A number of providers pay 4.6 per cent and 4.5 per cent in their fixed rates for a year.
Another base rate increase should mean better savings rates on the cards. Please note that savings rates change daily.
After retirement, annuities allow you to use all or part of your pension savings to purchase a guaranteed fixed monthly income until you die.
For more than a decade, they have been almost worthless because interest rates have been so low. Now, they are starting to look more attractive.
Tom Selby, head of retirement policy at investment platform AJ Bell, said: ‘Annuity rates have risen 40-50 per cent this year.
A £100,000 fund could buy a healthy 65-year-old a single life level annuity paying £7,684 a year.
The Bank has indicated that this is not the last rate hike we will see, so waiting a bit longer before locking in could get you more for your money.
The best rates aren’t tied to inflation, so the payment will buy less each year as costs of living rise.
Pensions, overdrafts and everything else
Regulation sometimes prevents companies from passing on higher costs to customers, and if you have 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 based on interest rates, but most will move in line with inflation, which currently stands at 10.1 percent.
The Bank is raising interest rates to try to bring inflation down to two percent, so there is an effect, just less immediate.
The watchdog introduced rules a few years ago, effectively limiting overdraft fees.
It led to most checking account providers imposing a 40 percent fixed interest rate charge on overdrawn accounts. That is so expensive; pay it if you can. However, the rate will not go up with either 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 Council: 0800 144 8848
Debt Advice Foundation: 0800 622 61 51
Turn2Us: 0808 802 2000