How would a base rate rise impact your finances?
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Finance expert Derin Clark looks at the impact of base rate changes on our personal finances
In the lead-up to the November Bank of England base rate announcement many finance experts were predicting that base rate would be increased. On the day, however, the Bank of England Monetary Policy Committee decided to keep the rate at its current record low of 0.1%.
The speculation that base rate would rise was, in part, fuelled by hints from the Bank of England Governor Andrew Bailey that base rate would have to rise to help manage inflation. Even after base rate held, Bailey said: 'interest rates will need to rise and they will rise,' again fuelling speculation that base rate will rise, and might continue to rise, in the coming months.
The reason that the press spends column inches speculating about base rate is that it directly impacts most people’s finances. Traditionally, savers would often welcome a base rate rise, but for borrowers it could puhub dec 21 homeHUB Dec 21 Hosh already tight household budgets to the limit.
In the past, a rise in base rate would result in the interest rate on savings accounts also increasing. In the months leading up to November’s Bank of England announcement savings rates were already starting to rise, but this could be due to competition among newer ‘challenger banks’ pushing up rates, rather than banks anticipating a base rate rise. A rise in base rate should, however, help savings rates continue their recovery after falling to record lows during the pandemic.
Meanwhile, for mortgage borrowers an increase in base rate will likely result in having to pay higher monthly repayments – especially those on tracker mortgages or on their lender’s standard variable rates, both of which are directly linked to base rate. Usually, tracker and variable rate mortgages will start to see rates increase within three months of a base rate rise. For those already locked into a fixed rate mortgage, their mortgage repayments are fixed for the term of the deal no matter if base rate rises or falls. This is why mortgage borrowers are urged to consider locking into a fixed rate deal when there is the prospect that base rate will rise.
For other types of borrowing, such as credit cards and personal loans, an increase in base rate will be unlikely to directly impact the interest rates offered. Instead, these lenders will look at the overall economy, particularly focusing on lending risks when setting rates. If an increase in base rate results in homeowners struggling to keep up with monthly repayments it could, however, make any type of lending riskier, which could push up credit card and personal loan rates as a result.
Although base rate was not increased in November, it is unlikely to stay at its current record low for long. Some finance experts predict that base rate could rise to as high as 1% over the next 12 months, which would be the highest it has been in over a decade. Even a slight rise could put a strain on many people’s finances, especially those who have become used to cheap borrowing rates.
Derin Clark is an Online Reporter at moneyfacts.co.uk, the money comparison experts, specialising in personal finance.