INTEREST rates have been raised for the first time in three years, causing misery for millions of people as the Bank of England seeks to fight rising inflation.
The bank today voted 8-1 in favor of raising interest rates from their all-time low of 0.1% to 0.25%.
Here are the main winners and losers from the Bank of England base rate change.
Interest rates, or the cost of borrowing, have reached record levels since they were reduced from 0.75% to 0.1% when the pandemic struck in March 2020.
But the Bank of England’s monetary policy committee was rumored to be considering raising interest rates to help stem the rising cost of living.
Inflation this week hit a decade-long high of 5.1%, driven by skyrocketing energy bills and oil prices.
The latest rate hike is the first since August 2018, when rates went from 0.5% to 0.7%.
Interest rates are used to set the price of a range of products by banks, building societies, pension companies, and other financial providers.
Here are the main winners and losers.
Savings rates have fallen to record levels in recent years due to low interest rates.
Technically, rising interest rates could make savings offers more competitive.
There is no guarantee on this, as it is always up to the banks to determine the amount of interest they pay to savers.
The small increase is unlikely to provide much comfort to savers anyway.
If you had £ 1,000 in a savings account earning 0.1% interest, you would only earn £ 1 interest per year.
If that goes up to 0.25%, you’ll earn £ 2.50 a year in interest.
Santander was one of the first banks to announce that it would increase savings rates in line with the base rate.
Savers will earn an additional 0.15 percentage point from January 12.
Laura Suter, personal finance manager at AJ Bell, said: “Even with rising interest rates, savers should be aware that inflation is rising faster.
“No cash account is going to beat inflation right now, so you really have to ask yourself if you need your money just in case or if you might consider investing it. “
The first easy-to-access savings account is currently paying 0.71%. If this increases against the base rate to 0.86%, even someone with a savings pot of £ 5,000 would only earn an additional £ 7.50 a year in interest.
Retirees have been affected by the drop in interest rates as it influences the price of annuities.
Retirees can use their pension to buy regular income by purchasing an annuity.
This has not been attractive in recent years due to low interest rates.
But annuity providers could increase their payments based on rising interest rates, which could make this option more attractive to retirees.
However, it was also pointed out that fixed income retirees could already be affected by the rate hike as their expenses are likely to rise.
Homeowners on follow-up mortgages
Tracker mortgages charge an interest rate that follows the base rate of the Bank of England.
It is usually a few percentage points above the base rate.
This means that if the rate goes down, your monthly mortgage payments get cheaper – but your payments will also go up if rates go up.
Mortgage borrowers on follow-up offers will now see an increase in their monthly payments and your lender will contact you to find out when the highest payment will begin.
About 850,000 borrowers are currently on a tracker mortgage.
UK Finance estimates that a 0.15 percentage point increase will add an additional £ 15.45 to monthly repayments.
Meanwhile, the 1.1 million homeowners on their lender’s Standard Variable Rate (SVR) will see an average of £ 9.58 added to their monthly repayments.
Mortgage lenders price their products based on interest rates.
If rates are low, money is cheaper for banks to access and lend.
Borrowers have taken advantage of this in recent years and mortgage rates have fallen to all-time highs, but that could all change now that the base rate is rising.
According to Nationwide, if you had a 25-year £ 100,000 mortgage at 2.05% and your rate increased 0.15 percentage points, that would add £ 7 to your monthly payment.
Those with a £ 200,000 mortgage would see £ 15 per month added to their monthly repayments – £ 180 per year.
Whereas those with a mortgage of £ 300,000 would pay an additional £ 22 per month, or £ 264 per year.
Charles Roe, Director of Mortgages at UK Finance, said: “For those who have reached the end of their mortgage contract, a wide range of products are available and we encourage homeowners to shop around.
“All clients with concerns about managing their mortgage should contact their lender, who will be able to explore the range of individual support options available. “
It’s worth remembering that homeowners can usually remortgage six months before their current contract ends, so you don’t have to wait if yours ends next year.
Credit card users
Interest rates on credit cards are already high, with annual percentages over 20% in some cases.
Suppliers could use this latest increase to justify higher fees.
According to Moneyfacts.co.uk, credit card users with a balance of £ 3,000 would pay £ 4.86 more interest over 18 months to pay off their debt if their card’s interest rate rises.
It’s a reminder to anyone in debt on an expensive credit card to switch to a 0% credit card if possible, or to speak to their provider if they’re having trouble paying back.
During this time, anyone who is overdrawn will also pay more fees.
Karl Tippins, financial expert at Pension Times, said: “Many retirees and low-income families rely on their overdraft towards the end of the month to make ends meet.
“This could now leave some families without because they just can’t afford the interest rates.”
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