What could rising interest rates mean for your money?

Over recent weeks, you will have seen or read many news reports about the rising cost of living.

Indeed, the first quarter of 2022 has seen significant increases in the price of energy, fuel, food, travel, and other key areas of our day-to-day lives. According to the Office for National Statistics (ONS), the Consumer Price Index rose by 5.5% in the 12 months to January 2022.

In light of these widespread price rises, you may be understandably concerned about the state of your personal finances when it comes to affording the life you want.

The role of interest rates in the cost of living

One key factor at play when it comes to the cost of living in the UK is the base rate of interest set by the Bank of England (BoE).

In March 2022, the BoE raised the base rate from 0.5% to 0.75%, in an effort to slow the rate of inflation. By increasing interest rates, the BoE is attempting to slow the public’s spending, thus reducing the demand for goods and services and, hopefully, curbing inflation.

A base rate of 0.75% is still historically low, but it could still have an impact on your wealth going forward.

While the base rate climbing could seem like yet another blow to your finances this year, this tactic employed by the BoE could in fact help your financial situation in the long term.

Read on to find out what this rise in interest could mean for your wealth.

Your mortgage bills could rise in line with the base rate

One aspect of your life that a base rate increase could directly affect is your mortgage. The way interest rates affect mortgages depends on the type of mortgage you have.

For example:

• A tracker-rate mortgage will be immediately affected, because you pay interest directly in line with the BoE’s base rate. So, your tracker-rate mortgage repayments can be expected to increase straight away.
• A variable-rate mortgage, the rates of which are dictated by your mortgage lender, could potentially see higher payments, if your lender decides to pass on the base rate increase.
• A fixed-rate mortgage is unlikely to be affected as your repayments are fixed for a specified period.

If you have a tracker- or variable-rate mortgage, you could have already seen your monthly repayments increase at the beginning of 2022.

You could consider switching to a fixed-rate mortgage if you are able to exit your current agreement without paying any early repayment charges. This might help you more reliably budget for your monthly mortgage repayments in the coming years.

If you’re applying for a mortgage in 2022, interest won’t be the only factor to consider

If you’re thinking of applying for a mortgage in 2022, you could encounter other hurdles. In light of the high cost of living across the UK, mortgage lenders, including HSBC, are reported by the Telegraph to be tightening their affordability criteria.

In response to stricter affordability checks, you may need to save a larger deposit for the home you want, and ensure your credit report is up to date.

Working with a financial planner can be extremely helpful in these circumstances, so please get in touch if you intend to apply for a mortgage this year.

Your savings and investments could benefit from interest rates rising

Higher interest rates might mean your mortgage becomes more expensive, but they could also mean your savings and investments get a much-needed boost.

Indeed, since the BoE lowered the base rate to 0.1% in March 2020, in response to the economic difficulties faced in the wake of the pandemic, investors have seen almost negligible returns in many cases.

However, in light of the base rate increase, your savings and investments might see more positive returns going forward, helping you balance out some of the higher costs you could be facing in light of rising inflation.

Experts predict interest rates could steadily climb for the next year

If you are wondering whether the BoE is going to raise the base rate again, you aren’t alone. According to the Guardian, experts are predicting that, with inflation set to continue climbing, it is likely that the BoE may implement as many as two further increases in 2022.

Get in touch

If you’re concerned about rising interest rates and what they might mean for you please get in touch. Email enquiries@prosserknowles.co.uk or click here to request a callback from one of our advisers.

Please note

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

In addition, the value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Finally, this article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.