Interest rates have been staggeringly low recently, following the Bank of England’s decision to lower its base rate in March 2020 to 0.1 percent – which it has not changed since. However, the markets are now pricing in a rise in the base rate from 0.1 percent to 0.25 percent in December, with a move to 0.5 percent by March. This could have a significant impact on wide numbers of people who may need to take action on the matter.
Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “After 18 months of rock bottom interest rates, rises could be lurking around the corner, ready to deliver a nasty shock to anyone who has borrowed money.
“We all need to consider what it would mean for us, and take steps to protect our finances.
“Rate rises are now priced into the market before the end of the year, as a result of a deluge of inflation warnings, plus hints from some of the Bank of England’s rate setters.
“So it’s a good time to take stock, and make sure your finances are resilient enough to cope with any changes.
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If interest rates were to rise, mortgages have been identified as the product which would take the hardest blow.
Those who are on a standard variable rate (SVR) are likely to see their sum increase with the Bank of England’s changes, and therefore may wish to shop around for a fixed rate deal before the changes kick in.
Ms Coles said taking action on this matter “sooner rather than later” is key, as if banks are convinced rises are on the way, fixed rate deals surge before an announcement.
Similarly, those who are coming to the end of a fixed rate deal may need to make the switch to a new deal to ensure they do not lapse onto a potentially expensive SVR.
Those who have six months or less left on their fixed deal, can start shopping around for a new mortgage now, because lenders will let people lock in a rate up to six months in advance.
However, mortgages are not the only form of borrowing which is set to feel the impact of an interest rate rise.
Ms Coles explained: “Most consumer borrowing is fixed, and while credit card costs can rise, they’re not necessarily linked to the Bank of England’s decision.
“However, if you’re planning to roll over existing borrowing or take on new debts, you need to consider your position.
“The right solution will depend on how much debt you’re carrying, and what you’re paying for it. In some cases, a fixed rate loan will give you the certainty you need.
“In others, you might be able to switch to a credit card charging zero percent on balance transfers, and focus on reducing your debt as much as possible before the interest-free period expires.”
Another group which is also likely to be affected by an interest rate rise is those saving money. However, this could end up working in their favour.
This will be a difficult balance to strike in the meantime, as some may wish to wait for a better fixed rate deal, while others do not wish to let their money languish about for too long.
In addition, an interest rate rise does not necessarily mean savings will automatically improve as Ms Coles highlights banks are often slow to pass on improvements to their customers.
She added: “If you’re keen to play the wait-and-see game, it’s well worth switching to the most competitive easy access account while you do so. Alternatively, it may make sense to fix for a shorter period.
“A competitive six-month fix, for example, is currently paying 0.85 percent and a one-year fix 1.51 percent.”