Interest rates rise preview: what it could mean for personal finances

The Bank of England is expected to green-light the 13th consecutive interest rate rise to curb sticky inflation.

Commenting, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “The consensus view seems to be that the Bank of England’s Monetary Policy Committee is odds-on to green-light the 13th consecutive interest rate rise, as part of its ongoing battle against hot and sticky inflation. While savers may benefit from higher interest rates, borrowers face increased costs for loans, mortgages, and credit card debt. As such, it's crucial to strike a balance between borrowing and saving based on your financial goals."

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Mortgages 

“The prospect of further increases to the base rate has already sent ripples through the mortgage market, impacting both current and aspiring homeowners. The past couple of weeks have seen something of a hokey-cokey in the marketplace, with lenders pulling deals shortly after launching them after being swamped by applications from borrowers rushing to refinance before rates rise even higher. Those that have returned to market come with a higher price tag.

“Take a deep breath if you're among the vast majority of mortgage holders with a fixed-rate deal. For now, you can breathe easy, as the immediate effects of an interest rate rise won't knock on your door. Fixed-rate mortgages provide a temporary sanctuary from the storm, offering borrowers a set interest rate for a fixed period. However, it's important to keep an eye on the horizon, as once that shelter expires, you might have to face the music of higher rates when refinancing or renewing your mortgage. More mortgage misery looms for the circa 700,000 borrowers with fixed-rate mortgages - the majority of which were set at interest rates below 2% - maturing in the second half of this year.

“The estmated 1.6 million homeowners on variable and tracker rates should brace themselves for yet another climb in mortgage costs in step with the movement of the Bank of England's base rate.

“The consequences of an interest rate rise can ripple through the sector, causing a slowdown in demand for new mortgages and potentially cooling the flames of house price growth. In addition, discouraged by the uphill struggle, aspiring first-time buyers have found themselves locked out of home ownership, fuelling demand in the rental market. This, in turn, places upwards pressure on rental prices, exacerbating the overall affordability crisis.”

Savings

“Savings rates have been pumped higher in recent months. Easy-access savings rates have hit 4% for the first time since 2009, and market-leading one, two, three and five-year fixed bonds all offer 5.30% or more.

“How high savings rates will go is anyone’s guess, but it's worth keeping in mind that the extent of the interest rate increase and the competitiveness of savings rates may vary. Different savings providers offer different rates, so shopping around for the best deal remains the name of the game.

“It is important to bear in mind that buying power of cash saving is being eroded by high inflation, which at 8.7%, far outstrips the market-leading savings rates. Those who can afford to put money away for five years or more should consider investing for the potential of long-term inflation-beating returns that far outstrip savings rates.”

Borrowing

“When it comes to borrowing, common debt arrangements such as a personal loan or car financing won’t usually be affected by changes to interest rates because a fixed rate of interest is typically agreed before the loan is taken out. However, the rate of interest applied to credit cards and overdrafts could go up - even though they are not directly linked to the BoE base rate.”