The Bank of England’s decision to increase interest rates from 0.25% to 0.50% marks the first increase to the base rate in over 10 years, and is the result of higher inflation and persistent uncertainty surrounding Brexit. We explain what this rise might mean for your finances.
If you’re a saver…
Today’s rate decision might see you jumping for joy, as it marks the first positive base rate move in more than 10 years. However, Charlotte Nelson, finance expert at Moneyfacts says you want to hold back on the celebration, since the link between base rate and savings rates seems to be severed.
“Savers have struggled to find a decent return with rates at rock-bottom. For example, the average easy-access account stands at 0.39% today, while back in July 2007 (the last time base rate rose) it stood at a whopping 4.05%. Savings rates have finally taken a positive turn over the past year, with challenger banks stepping in to offer savers some sort of return. As a result, the average two-year fixed rate has risen from 1.09% a year ago to 1.44% today.
“Given it’s been such a long time since the market has seen a base rate rise, it's difficult to tell whether providers will increase their rates straight away or decide to wait and see what the rest of the market does before making their move."
- If you're looking for a savings deal now, check the Best Buys to ensure you're still getting the best rate.
If you’re a mortgage-holder…
Competition in the mortgage market has remained high and borrowers have experienced some of the lowest rates on record. However, the speculation prior to today’s base rate rise has been causing rates to creep up since September and so today’s announcement may see an end to the lowest of deals.
Charlotte Nelson says: “Lenders have been keen to attract the attention of borrowers to protect their mortgage book in case of a rate rise, which is one of the main reasons both the cost and availability of deals has improved.
“The last time the markets saw a base rate rise, in July 2007, the average two-year fixed rate stood at 6.24 per cent, whereas today the rate is significantly lower, sitting at 2.33 per cent. Over the same period the Standard Variable Rate (lenders' default rate) - has fallen from 7.41 per cent to 4.60 per cent today.
“This rate increase will have a significant impact on those currently on their lender's Standard Variable Rate (SVR). Based on the average SVR of 4.60%, today’s rate rise represents an increase of £28.72 to monthly repayments. However, with fixed-rate mortgages still low, borrowers will be significantly better off switching deals now before it may be too late.”
- Check out the best buy fixed-rate mortgages.
If you’re coming up to retirement…
The interest rate rise is good news for those on the verge of retirement who may be looking to secure an income through an annuity, as it’s likely to boost gilt yields, which underpin annuity rates. Although gilt yields have started to increase in recent weeks, they remain low on a historic basis and the increases have yet to fully feed through to annuity rates.
Richard Eagling, Head of Pensions at moneyfacts.co.uk, says: "A significant boost in annuity rates is long overdue, with annuity income having fallen every year since 2014. It will be interesting to see whether any rise in annuity income encourages more retirees to consider the merits of an annuity rather than simply opting for income drawdown.”