The interest rate rise of a quarter of a per cent on November 2nd doesn’t sound like much. But will it affect you? And what if rates go up again – what can you do to protect yourself? This is new territory for most people in their 20s who will never have seen an interest rate rise.
The first rate rise for 10 years
Bank of England base rates remained unchanged at 0.5% from March 2009 until August 2016 when they were cut another 0.25%. The last rate rise was in July 2007, ten years ago.
These are abnormally low rates that have continued for an unprecedented length of time. A quarter of a per cent rise only reverse the emergency post Brexit referendum cut – it doesn’t take rates back to anything like normal. But at the moment future increases are expected to be small and gradual. The financial markets are currently predicting a couple more rises in the next three years, with the first coming in the next year.
Game of Thrones fans know the phrase Winter is coming. Ominous and foreboding, it is the motto of the House of Stark. At the start of the series the “long summer” has been going on for nine years, but the signs are that the climate is about to change and a harsh winter is going to arrive.
Will you be affected?
People with a tracker mortgage
Most tracker mortgages follow the Bank of England base rate, so these should go up by exactly a quarter of a per cent. That’s roughly an extra £20 a month more for every £100,000 of your mortgage. HSBC, NatWest and RBS are raising rates immediately, Halifax, Santander and Nationwide are increasing rates from December.
Many older tracker mortgages are still going to be at very low interest rates even after the new rise. If you have one of these it is may still be a great deal and it’s unlikely to be worth trying to fix your rate unless you have a lot of equity and want a very long fix – 5 or more years.
If you don’t want to fix, another way to protect yourself from future rises is to start overpaying the mortgage by as much as possible. This may sound illogical when your mortgage is “cheap” but it is easier to pay off cheap debt now than it will be when the interest rates go up again.
People on a variable rate mortgage
Most variable rates mortgages are on their lender’s Standard Variable Rate. Although these tend to move in line with interest rates generally, they don’t have to. Although most SVRs are likely to go up by a quarter of a per cent, a few smaller lenders have announced they aren’t changing theirs (Saffron, Skipton, Newcastle) and it is possible some lender will increase their SVR by a bit more. The broker, L&C has a SVR Watch page which it is keeping updated.
SVRs are much higher than the current fixed rate mortgages on offer. Most people with a variable rate mortgage should be thinking of remortgaging to a fixed rate as soon as possible. See the To fix or not to fix? section in Should you remortgage?
People whose fixed mortgage is ending soon
While your fixed rate continues, your mortgage payments won’t change. But when it ends, the SVR you move to will be higher because of today’s rate rise and the fixed rate mortgages you can change to are likely to be more expensive.
With the likelihood of more increases to come, you may want to consider going for a long term new fixed rate, even though longer fixes are more expensive.
People who need a loan
Loans have been at record low rates and are likely to be a bit more expensive. But banks decide to lend a fixed number of millions of pounds at a particular rate, so if you are just about to apply, you may still be able to get the “old rates” if you move quickly. See MSE’s loan eligibility checker for what you may be approved for.
People who want a 0% balance transfer offer
Most credit card interest rates are unlikely to change. But there has been a recent trend for the “best buy” offers for balance transfers to get a bit less good – in May you could get a 43 month deal, at the start of November it is down to 39 months. The increase in interest rates will make these o% deals a bit less profitable for the banks so this trend is probably going to continue.
UPDATE November 9th – the longest 0% deal on offer has now dropped another month to 38 months, see Getting a 0% balance transfer.
So if you need to refinance some debt, this is a good time to do it. And to protect yourself in future it will be wise to start actually paying off the debt, not assume that you will always be able to get another balance transfer again later
Higher rates make debt problems harder
For some homeowners, low mortgage rates have acted as a cushion, letting them cope with increases in their bills even though their wages and benefits haven’t gone up. Now interest rates have started to rise, more people may find their debts harder to manage.
Having to pay more to your mortgage is also bad news if you are already in a debt solution such as a debt management plan (DMP) or an IVA.
In a DMP you should contact your DMP firm and ask if you can reduce your monthly payment by the amount your mortgage is going up. This will increase the time it takes to clear your debts. Often an IVA is suggested as a better option if you have a house, but see the next paragraph and remember that more interest rates are coming in the next few years…
In an IVA you need to talk to your IVA firm about reducing your payments. If you had your payments increased when rates were cut last year, then this increase should be removed. For other people the problem here is that you can usually only decrease your IVA payment by 15% – if you need a bigger cut your creditors have to approve this. If this is early on in your IVA and the change would be a big cut in what you are paying, your creditors may not agree, so you have the horrible choice between failing your IVA and managing to make the higher mortgage payments on a very tight budget.