How will rising interest rates and inflation affect you? Business News

Interest rates are rising for the fourth time in six months, meaning higher monthly payments for around 2 million homeowners.

The Bank of England raised its key rate from 0.75% to 1%, a level not seen since 2009.

It is hoped the move will help contain an alarming rise in inflation, but it means high street lenders will raise the rates they charge on mortgages and variable rate loans.

Borrowers will therefore face higher costs at a time when energy bills and food prices are rising rapidly. Meanwhile, savers can expect slightly better returns on their money.

So how will the Bank’s interest rate hike affect people’s mortgages, savings and investments?

How will owners be affected?

Of the nearly 9 million residential mortgages outstanding in the UK, less than a quarter will be immediately affected by the latest interest rate hike.

Just under one in 10 mortgages is a tracker, meaning the rate borrowers pay is directly linked to the Bank of England base rate. Approximately 850,000 homeowners will immediately see the interest rate they pay increase by 0.25%.

A further 1.1 million people are on a standard variable rate (SVR), often because it’s the default deal their lender has offered them once a fixed rate deal has expired.

These rates are set by individual lenders and tend to follow the Bank of England base rate closely.

Three-quarters of outstanding mortgages are fixed rate, meaning these homeowners won’t feel the immediate impact of a base rate hike, according to figures from trade association UK Finance.

However, if rates remain higher, these borrowers will find that they have to pay more each month when they renew their mortgage contract.

What will the impact on mortgages look like in terms of liquidity?

The average borrower on a follow-on mortgage will pay around £25 extra in interest per month, according to UK Finance. This is based on an outstanding balance of £121,034.

Someone with a typical SVR balance of £76,499 would pay around £16 more per month, assuming the lender passes on the 0.25 percentage point base rate hike in full.

What can mortgage holders do in the face of increases?

Variable rate borrowers can protect themselves from rising interest rates by entering into a fixed rate agreement. The average two-year fixed rate has risen in recent months to more than 3%, according to moneyfacts.co.uk.

The Bank of England indicated on Thursday that it could raise its base rate further this year, and markets expect further hikes to be on the way.

Will rising rates mean better news for savers?

Rachel Springall of moneyfacts.co.uk said the average interest rate on easy-access savings accounts had risen just 0.20 percentage points since November, from 0.19% to 0.39%.

She added: “There is still room for improvement in the industry, but as rates rise it is wise to compare offers and switch. As discussed earlier, it may take a few months for customers to see any benefit from a base rate hike, but there is no guarantee that savings providers will raise their rates.

Ms Springall said a fully passed-on 0.25 percentage point increase would equate to savers receiving £50 more a year in interest, based on a £20,000 investment.

Retirees could also see their income increase. In April 2021, a pension pot of £100,000 would give you a single life annuity income of £4,882 a year. Now that figure has risen to almost £5,600.

Anything else savers can consider?

Paul Titterton, head of digital at Abrn, suggests some people might consider investing in stocks and shares.

Mr Titterton said: “Anyone who is able to put money aside for their future should consider where they are saving and their attitude to risk. Although cash savings are safe, they are affected by low interest rates and rising inflation. Stocks, stocks and investment Isas carry more risk, but could potentially offer higher returns over the long term.

What could be the implications of a rate hike on investments?

Jason Hollands, Managing Director of Bestinvest, said: “Rising borrowing costs have implications for how investors value companies, and in this regard ‘growth’ companies in sectors such as technology and communication services are particularly vulnerable.

“That’s because investors value these companies primarily on the basis of future earnings projections, rather than their current earnings, so when rising borrowing costs and inflation create greater uncertainty about the value silver future, investors are revising their view of what these companies should be valued at.

“On the other hand, some companies are much more resilient to the current environment. Banks can actually benefit from rising interest rates, energy prices are a major component of inflation and some companies offer hard-to-reproduce products and services that customers can’t live without, so can…