Interest rates: What the rise means for your mortgage, loans and investments

The Bank of England has increased the benchmark rate from 0.5% today

The Bank of England’s Monetary Policy Committee has raised the benchmark rate of interest from 0.5 per cent to 0.75 per cent.

But what will this mean for household finances?

Savings

Long-suffering savers have become used to rock-bottom returns with some banks currently paying just 0.05 per cent a year on instant access savings accounts.

While there is now likely to be some movement in this, don’t expect massive jumps in returns.

The 0.25 per cent rise is not sufficient to make much of a difference to returns.

Add to this the fact that banks have been notoriously bad at passing on increases to customers.

For example, the BoE raised rates by a quarter of a percent in November but the average rate on an easy access account went up just 0.07 per cent between September 2017 and this week.

That equates to an extra 70p in interest per year for every £1,000 of savings.

The most generous rate for an instant-access saver on money.co.uk is currently 1.5 per cent, still some way below inflation at 2.4 per cent.

Mortgages

More than 40 per cent of homeowners are currently on variable or tracker mortgages, meaning millions now face rising costs to service their debt.

“The very cheap deals we have seen in recent years - some as little as sub one per cent - are likely to be a thing of the past," said Sally Francis-Miles, money spokesperson at MoneySuperMarket.

"Those with tracker mortgages will see them increase automatically and those on variable rates are likely to have any increase passed on in the coming weeks.

"Fixed deals will be fine until they end. However, once they do, you’re likely to find yourself paying more than your current deal."

A 0.25 per cent rise translates to a small increase in monthly payments from £508 to £519 for a household with an £87,000 loan - the national average.

A borrower with a £250,000 mortgage on a typical standard variable rate deal of 3.99 per cent will need to find £400 extra per year.

That may sound manageable but many households are already stretched after a prolonged period in which wage growth has lagged behind the rising cost of goods and services.

Even a small rise to essential costs is therefore likely to have a negative impact on the consumer spending that drives the economy, which has a knock-on effect for businesses selling goods and services.

Debt

As with mortgages, the cost of unsecured debt will also rise. This comes as the Office for National Statistics (ONS) said last week that UK households spent £900 more than they received in income 2017, a worse figure than at any year on record.

With millions of consumers now relying on taking on debt to fund basic spending, the rate rise is likely to hurt economic growth, with retailers potentially the first to be hit hard.

Confidence among UK consumers is already low and fell again in July, thanks to pessimism about the wider economy, according to a long-running index from GfK.

Investments and markets

Markets are unlikely to be affected in a big way by a 0.25 per cent rate rise as the impact has already been factored into asset prices.

It is likely to increase the pound’s value, as higher interest rates mean better returns for people holding that currency.

A move up to 0.75 per cent increases the cost of borrowing for the government and companies, the flip side of this being that those who invest in that debt such as pension funds receive better returns.

However, the base rate is still close to its lowest point in history, meaning investors looking for decent returns will still need to look to the stock market or further afield.