The Bank of England’s inflation-stifling quarter point interest rate rise to 0.75 per cent is designed to discourage the nation’s dependence on borrowing over saving.
As interest rates lift off for the second time in 10 months The Mail on Sunday suggests five financial steps to avoid a bumpy ride ahead.
Make your mortgage fit for purpose
Mortgage borrowers who have fixed rate loans have nothing to fear from the rate rise.
The Bank of England’s inflation-stifling quarter point interest rate rise to 0.75 per cent is designed to discourage the nation’s dependence on borrowing over saving
Their repayments stay the same. But the one in three who have variable rate loans – whether a lender’s standard variable rate or a tracker deal – will quickly feel the heat of higher monthly repayments. Lenders like to pass on rate rises – in full and almost straight away. For a borrower with a £130,000 mortgage that means an extra £192 a year, according to Andrew Hagger of financial analyst MoneyComms.
TAKE CONTROL: Ensure you are on the best possible deal. Those on a standard variable rate – on average 4.5 per cent – could more than halve their annual repayments by transferring to a two-year fix for as little as 1.35 per cent with Yorkshire Building Society or a five-year deal at 1.94 per cent with HSBC. Borrowers on fixed rate deals can also switch but beware of onerous penalties for cashing in early.
Get savings into shape
Providers will not automatically reward savers with a 0.25 per cent rate boost – and certainly not quickly. Following November’s base rate rise, they only rewarded selected savers. According to savings expert Anna Bowes of rate watching website SavingsChampion a ‘shocking’ half of all variable savings rates stayed the same.
TAKE CONTROL: Thanks to competition from newer banks, especially for fixed rate bonds, there are now more places to make your savings word harder.
One couple relieved to have taken pre-emptive action before last week’s interest rate rise are Dominic and Anna Quinn. They fixed their mortgage at 1.74 per cent for five years
According to rate scrutineer Moneyfacts the average two-year fixed rate bond pays 1.58 per cent and five-year fixed rate bond 2.15 per cent. Although these still do not outpace inflation – currently 2.4 per cent – they beat hands down the paltry 0.53 per cent paid on an average easy access account.
Move £10,000 to the average two-year fixed rate bond and annual interest will balloon from £53 to £158. Consider keeping up to £20,000 a year out of the taxman’s reach with a cash Isa.
Ensure unsecured debt is manageable
The interest rate rise is designed in part to put the brakes on consumer borrowing. Householders have turned to plastic in straitened times to keep their finances afloat. A hazard for borrowers is that the average card rate is already a precipitous 23 per cent – compared to nearer 15 per cent before the 2008 financial crisis hit. The Bank rate rise could push this even higher.
CASE STUDY: We’re looking for a better home for our savings
One couple relieved to have taken pre-emptive action before last week’s interest rate rise are Dominic and Anna Quinn. They fixed their mortgage at 1.74 per cent for five years.
The Quinns moved into a new five bedroom house in Leeds five weeks ago with daughter Grace, aged 10.
IT worker Dominic, 42, says: ‘I am risk averse and wanted to be sure we could afford the repayments whatever happens to the economy over the next few years.’
The couple used a comparison website to locate mortgage deals and ended up with Yorkshire Building Society. Dominic now plans to turn his attention to savings. He says: ‘The interest rate rise has now prompted me to think about looking for a better home for our cash.’
The Quinns moved into a new five bedroom house in Leeds five weeks ago
TAKE CONTROL: Cardholders with strong credit ratings can cut costs by applying for low or zero per cent cards. The choice is dwindling with providers tightening up on the most generous deals. But there are still some available, with a couple offering more than two years’ interest-free both for balance transfers and spending. But check the small print. For example, Santander has a 30-month zero interest deal for purchases and transfers but charges a £3 a month fee, while Sainsbury’s Bank’s 28-month deal levies a 3 per cent charge for a transferred balance.
Get the best deals for currency
The pound strengthened temporarily following the rate rise announcement – surprised by the fact all nine of the Bank of England’s Monetary Policy Committee voted for the increase.
But it soon drifted back to a lacklustre level, essentially meaning travellers are getting a raw deal for converting sterling to popular currencies such as the euro and the US dollar.
TAKE CONTROL: Holidaymakers cannot do much about the performance of the pound on world currency markets. But the way they purchase or use their currency on their travels can have a more serious influence on how far their pound will stretch abroad.
Poor buying decisions – such as purchasing currency at the airport where rates are poor, using an expensive credit card or falling foul of retailers and cash machines that encourage you to pay in pounds while abroad rather than in the local currency – all eat away at holiday spending.
According to foreign exchange specialist FairFX someone taking the average £1,400 of travel money can lose £175 simply by purchasing currency at the airport.
The FTSE index of leading UK shares was only slightly rattled by the interest rate hike last Thursday – and then bounced back. But for those investors who think future wobbles might be more serious – especially as Brexit nears – the message is not to give up on shares but to diversify. Whether it is your pension or Isa, spreading your investments around different assets is the best way to protect your wealth.
TAKE CONTROL: Calum Bennie of Scottish Friendly says: ‘Cash account rates are unlikely to beat inflation, so stocks and shares Isas remain a better choice for those looking to grow their savings over the long term.’
Patrick Connolly, of financial adviser Chase de Vere, says: ‘It is important to have a mix of investments including shares, property, bonds and cash so that when one is down another will be up.’
Always watch out for the tax implications of income and gains from investments.
By investing via a tax-friendly Isa, it is possible to build wealth outside the taxman’s reach. Everyone has an annual allowance of £20,000 that can be divided between cash, shares or peer-to-peer investments.