It may only be by 0.25% but after months of speculation, Mark Carney, governor of the Bank of England, finally announced on 2nd November that the bank was raising interest rates to 0.5%.
This was the first interest rate rise in ten years and brought the rate back to where it was before the referendum. Although this means the rate is still at an historically low level, it was a rise nonetheless. It’s also thought the rate will rise twice more over the next three years to 1% – in two increases of 0.25%, one next year and one in 2020.
Of course, how you responded to the news will obviously depend on your particular financial position.
What it means for mortgage holders
If you’re one of the 4 million people who have a variable rate mortgage, you will see an increase in your monthly payment with immediate effect. On average, the amount owed is £89,000 so the rise would equate to approx £11 a month, according to UK Finance. In contrast, the majority of new mortgages are fixed rate ones, usually over a two or five year term. These rates did start to increase in expectation of the rise but borrowers will not see a further immediate increase. They may, however, discover they need to make higher monthly payments at the end of the term.
And for savers
If you’re one of the UK’s 45 million savers, however, the interest rate rise represents a (small) piece of good news. You’ll start to see higher returns at last from a savings account. A number of providers have already announced they will be increasing savings rates in line with the rise.
On average, an easy-access savings account currently pays interest at 0.14% annually, meaning that £10,000 worth of savings would generate just £14 every year. If providers choose to pass on the rates rise in full, this will add another £25, to earn £39 annually. A typical ISA, meanwhile, will see the annual growth on £10,000 increase from £30 to £55. While it may still seem a long way from the annual returns savers could expect ten years ago, things are moving in the right direction.
And for those buying an annuity
If you’re planning on buying an annuity in your retirement, you will also benefit from the rates rise. Annuities follow the yields on gilts, or long-dated government bonds and in anticipation of a rates rise, these have also increased.
Six years ago, a 65 year-old buying a joint annuity for £100,000 would have received an annual income of £5,404. In November 2016, that had dropped by £1,318 to £4,086. However, this month the figure has risen back to £4,468 and could continue to rise if the rates increase as predicted. Even so, the days of the 1990s when a £100,000 pension pot would have bought an annual income of around £15,000 are a long way away.
At Creative Wealth Management, we provide tailored advice on managing your finances over the long term. If you would like to discuss any aspect of how rising interest rates may affect you, please get in touch with your usual Creative consultant, or contact us at firstname.lastname@example.org.