The Bank of England has hiked its benchmark interest rate for the first time in more than a decade. While the move was widely expected it will affect millions of households as rates on savings, mortgages and other loans change. But what does this mean, in practical terms, for British families and companies?
More interest for savers...
Depositors should see the meagre returns they currently receive on their current account deposits improve slightly.
Some lenders have committed to passing on the 0.25 per cent rate rise to savers. Nationwide said the “majority” of savers will see improvements in their interest rate while Newcastle Building Society said it would pass on the rate in full.
Not all banks have been clear about their plans, however, and some may try to avoid or delay passing on the full impact of the rate hike to savers. This would boost their profits but probably result in a tremendous backlash from customers.
A rate rise of 0.25 per cent – to 0.5 per cent – means that someone with £10,000 saved will collect an extra £25 interest over the year. Markets are now pricing in another two rate rises of 0.25 per cent by 2020, so no one should be expecting blockbuster returns on their savings any time soon.
More expensive loans…
The Bank of England’s decision will make taking out personal loans slightly more expensive. The average interest rate on borrowing £5,000 has dropped to 8 per cent from 9.3 per cent at the time of the EU referendum. This was thanks to the cut in interest rates in August 2016. Now the base rate has increased to 0.5 per cent, unsecured borrowing costs are likely to rise again.
With concerns over unmanageable amounts of unsecured debt, a rise in borrowing costs will be viewed as one benefit of the interest rate rise by the BoE.
However, credit ratings agency Moody’s said last month that increasing interest rates could lead to difficulties for poorer households.
“This first rate rise in more than a decade could be a turning point for many households,” said Joanna Elson, chief executive of the Money Advice Trust, the charity that runs National Debtline.
“Future interest rate rises are likely to be slow and gradual – but even small increases in costs could cause significant problems for many households,” she added.
Calls to the National Debtline have increased by 10 per cent this year, according to the Money Advice Trust, and it expects demand for debt advice to increase significantly in an environment of higher interest rates.
Modest boost for pensions...
The interest rates rise will mean pensioners can earn more on their savings. Steve Webb, director of policy at life insurance and pensions company Royal London, said that the rise provides a modest boost for pensions.
“If today marks a turning point in interest rates, this should signal a gradual recovery in annuity rates and could help to reduce deficits in company pension schemes,” he added.
“But it is important not to get carried away. Assuming that the Bank of England sticks to its plan for ‘gradual and limited’ increases, this announcement is unlikely to radically transform the pensions landscape as rates remain at historically low levels.”
Higher costs on tracker mortgages...
Homeowners on tracker mortgages will be most quickly hit by the rate hike. Variable tracker mortgages track the BoE base rate at a fixed margin above or below it.
Now that interest rates have risen to 0.5 per cent, a homeowner on a tracker mortgage paying 2 per cent interest on a 25-year, £250,000 repayment could see their monthly instalment of £1,100 rise by about £30.
But as borrowers have tended to move away from tracker mortgages, this will affect fewer home owners. Around 57 per cent of the total stock of mortgage loans are on a fixed-rate basis.
For people on a fixed-rate mortgage, the downsides of the rate rise will not be felt until they remortgage their property.
It is still a possibility that mortgage borrowers with tight finances could find they are unable to cover an increase in repayment costs as a result of the BoE move, but this is unlikely to be widespread given that commercial banks have been put under regulatory pressure in the last few years not to lend to people who would not be able to cope with a modest interest-rate rise.
“The big changes that have taken place in our housing market over the last decade mean that barely one in ten families are at risk of seeing the overnight effect of today’s interest rate decision through higher mortgage costs,” said Matt Whittaker, chief economist at the Resolution Foundation.
Resolution Foundation analysis suggest that the average increase for variable rate mortgage holders of a 0.25 per cent rate rise is £6.40 a month.
Less expensive holidays…?
Typically an interest rate rise is associated with an increase in the pound, and therefore cheaper holidays for Britons travelling abroad. However, the pound actually fell against the dollar and the euro after the BoE’s announcement on Thursday, because interest rates now look likely to rise more slowly in future than had previously been predicted.
If the Bank were to signal that it is looking to raise rates again in the short term, this would likely send the pound higher. If the BoE remains on hold in the long term, the pound will likely fall.
The UK currency is still well below the $1.48 and €1.30 figures from before the Brexit referendum of June 2016. And many analysts say that – with Brexit uncertainty so high – the pound won’t be returning to those levels any time soon.
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