Depending on whether you are a saver or a borrower, the Bank of England’s decision last month to increase interest rates in the UK from 0.25% to 0.5% last month was either welcome, or a worry.
It was the first interest rate rise for more than a decade, and although relatively small, people with mortgages and credit card debt will soon start to feel the effects.
More rises to come
Experts predict that there will be at least another 0.25% rate rise in 2018, and possibly a second in the same year. That will take Bank of England base rate to 1%.
For people on variable rate mortgages, this could mean a rise in costs, which combined with existing debts, will stretch household budgets further. A recent survey by the Financial Conduct Authority in October 2017 found that half of the UK population are already financially vulnerable. Around one in six people would find it hard to cope with a £50 monthly increase in bills.
More than half of all homeowners are on fixed-rate deals, so their monthly payments will remain the same for the remainder of their fixed term, which could be several years. For those on variable rate mortgages, or whose fixed deals are coming to an end, borrowing is likely to be more expensive.
Some variable rate mortgages had already risen in the autumn in anticipation of the rate change, and so remained unchanged. Savers’ rates have also changed little, given that the interest rate rise was relatively modest.
If you are concerned at all about your repayments you can talk to your lender, who will be able to advise you of any changes to your monthly mortgage.
Philip Pearson, independent financial adviser and founder of P&P Invest in Southampton, says: “As a guide, borrowers could look at the cost of their mortgage in May 2016, when interest rates were last at this level.”
Annuity rates have risen a little. Their lowest point was August 2016, when, according to SharingPensions.co.uk, the benchmark annuity rate was £4,696. It currently stands at around £5,476 per annum, based on a fund of £100,000, taken at age 65, level and single life annuity. It hit a high of £7,908 in the autumn of 2008.
Credit cards and personal loans
The interest rate is usually set for the duration of the term for a personal loan, so you know what your outgoings are going to be. If you are planning to take out a new loan, you may find that costs have increased slightly.
With credit card companies, the variable rate can change, but card providers have to give you 60 days’ notice, and the option to pay off the remaining balance before the rise.
The real issue is inflation
Although people might worry about increases in interest rates, rising costs of everyday items such as food and petrol are arguably having a greater effect on household budgets than a 0.25% interest rate rise.
“The most significant increase in living costs has been in the cost of groceries, clothing and transport,” Philip Pearson says. “This is having a far greater effect on family finances that any potential interest rate rise. Most people have not budgeted for the increases in grocery bills and basic expenditure, which has gone up by 3% in the last 12 months. There has been a gradual increase in these costs and this could lead people to overspending.”
How to build financial resilience
Look at your monthly outgoings – if interest rates rose would you still be able to afford to pay your bills and outgoings and any outstanding debt? When you have identified areas where you finances are vulnerable, and what you need to change, then you can start to put an action plan in place.
That might mean reducing non-essential spending, and ear-marking spare savings to pay off debts or reduce the cost of your mortgage, rather than going on an expensive holiday. If you have not shopped around recently for utilities and insurance then do so and use the money you will save to pay off your debt a bit more quickly.
Drawing up a spending plan
If you are struggling to cope, then work out how much you can afford to spend each month, withdraw it as cash, and stick to that budget. Don’t use credit or debit cards, or your smartphone.
You might need to keep a spending diary. That means you record each transaction that you make, even small items – from your morning coffee and newspaper to your expenditure on food and petrol.
You’ll be able to see where your money is going, and decide whether you are gaining the most benefit from it. It will also help you identify areas where you are spending unnecessarily.
A shorter version of this article first appeared in Reader’s Digest Money