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Interest rates: What will the rise mean for you? Interest rates: What would a rise mean for you?
(4 months later)
The rise in base rates will produce both winners and losers. After the latest comments from the Bank of England, financial analysts think a rise in the Bank's base rate from 0.5% to 0.75% in May has become much more likely, with another one expected to follow in the Autumn.
The winners will include 45 million savers, who are likely to see higher returns from savings accounts. A number of providers have already announced they will be increasing savings rates in line with the rise. Any such rise would produce both winners and losers.
Those planning on buying an annuity to finance their retirement will also benefit. The winners could include 45 million savers, who have already seen interest rates begin to tick up after the previous rise in November.
But for at least four million households with variable rate mortgages, monthly payments are set to rise immediately. Those planning on buying an annuity to finance their retirement are also likely to benefit.
So how will you be affected? But at least four million households with variable or tracker rate mortgages are likely to see their payments increase once again.
Variable rate mortgages Variable-rate mortgages
Across the UK, 9.2 million households have a mortgage.Across the UK, 9.2 million households have a mortgage.
Of these, around half are on a standard variable rate (svr) or a tracker rate, amounting to between four and five million households. Of these, about half are on a standard variable rate or a tracker rate, amounting to between four and five million households.
These are the people who will be most affected, as their monthly payments will increase. These are the people who would be most affected, as their monthly payments would increase.
Those on such variable rates tend to be older, and with relatively small outstanding mortgage balances.Those on such variable rates tend to be older, and with relatively small outstanding mortgage balances.
On average, such households owe £89,000, and will face rises of between £11 and £12 a month, according to UK Finance. According to the Nationwide, a 0.25% rate rise means someone on a £200,000 mortgage would face paying around an extra £25 a month, or about £300 a year.
Fixed rate mortgages Fixed-rate mortgages
The vast majority of new mortgage loans - 94% - are on fixed interest rates, typically for two or five years.The vast majority of new mortgage loans - 94% - are on fixed interest rates, typically for two or five years.
Currently half of all outstanding loans are on fixed rates, equating to around 4.5 million households. Currently half of all outstanding loans are on fixed rates, equating to about 4.5 million households.
While such rates have already started to increase, in expectation of the rate hike, borrowers will see no immediate rise. Such rates have already started to rise since November's rate increase, and are now likely to tick up further over the coming weeks.
Of course none of these borrowers would see an immediate rise, even in May.
However, when such borrowers reach the end of their term, they may find they have to make higher monthly payments.However, when such borrowers reach the end of their term, they may find they have to make higher monthly payments.
That said, they could - depending on when they took out their loan - end up on a cheaper deal. Lenders offering fixed rates tend to be especially competitive.That said, they could - depending on when they took out their loan - end up on a cheaper deal. Lenders offering fixed rates tend to be especially competitive.
SaversSavers
The average easy-access savings account is currently paying 0.14% in annual interest, according to the Bank of England. So someone with £10,000 worth of savings is earning £14 a year. If the rate rise is fully passed on, they would earn an extra £25 a year, making £39 in total. In theory, saving rates should begin to rise, in anticipation of any rise in May.
A saver with £10,000 in a typical cash Individual Savings Account (ISA) would see their income rise from £30 a year to £55. But after November's rate increase, banks were slow to pass on any rise to savers, or they typically passed on a fraction of the full increase.
Following the Bank's decision, Nationwide, TSB, Skipton and Yorkshire Building Society have promised to increase their variable savings rates. According to the Bank of England, returns on cash Individual Savings Accounts (ISAs) actually fell in December.
Mark Carney, the Bank's governor, said he expected other providers to follow suit. While savers could expect returns of 1.47% in October, that fell to 1.23% in December.
However, as the chart below shows, that is still a long way from the annual returns that were available just two years ago. So savers should not start celebrating.
One problem in recent years has been that banks and building societies have been able to borrow money from the Bank of England very cheaply, so they haven't needed to compete for deposits from savers. However, competition for savers' deposits may increase in the months ahead, and this could have a beneficial affect on saving rates.
The Funding for Lending Scheme (FLS) and the Term Funding Scheme (TFS) have therefore helped to depress returns for savers. One reason for that is the end - in January - of the Funding for Lending Scheme and the Term Funding Scheme, which enabled banks to borrow cheaply from the Bank of England.
"The good news for savers is that both the FLS and TFS are ending at the beginning of 2018, so perhaps providers will start to need funds from savers once more," said Anna Bowes, a director of Savings Champion. Now the banks may have to turn to savers instead.
"This will hopefully really make a difference."
AnnuitiesAnnuities
The rate rise is also good for retirees buying an annuity - or income for life. Any rate rise might also good for retirees buying an annuity - a financial product that provides an income for life.
Annuity rates follow the yields - or interest rates - on long-dated government bonds, otherwise known as gilts.Annuity rates follow the yields - or interest rates - on long-dated government bonds, otherwise known as gilts.
With the expectation of rising base rates, these yields have also been rising, giving retirees better value for money when they buy an annuity.With the expectation of rising base rates, these yields have also been rising, giving retirees better value for money when they buy an annuity.
Back in November 2011, a 65 year-old buying a join annuity for £100,000 would have got an annual income of £5,404. Last year that had dropped by £1318 to £4086. Back in November 2011, a 65 year-old buying a joint annuity for £100,000 would have got an annual income of £5,404. Last year, that had dropped by £1,318 to £4,086.
However this month the figure has risen back to £4468. However, by December the figure had risen back to £4,468.
Depending on how the market views the likelihood of further base rate rises, annuity rates may continue to creep up.Depending on how the market views the likelihood of further base rate rises, annuity rates may continue to creep up.
According to Willliam Burrows, of Better Retirement, a 1% rise in gilt yields translates into an 8% rise in annuity rates. According to Willliam Burrows of Better Retirement, a 1% rise in gilt yields translates into an 8% rise in annuity rates.
But we are still a long way from the heady days of the 1990s, when a £100,000 pension pot would have bought an annual income of around £15,000 a year.But we are still a long way from the heady days of the 1990s, when a £100,000 pension pot would have bought an annual income of around £15,000 a year.
Long-term impact
As Mark Carney is fond of reminding us, future rises in base rates will be small, and the pace will be gradual.
So while the impact of the first hike may be small, someone with a mortgage advance of £150,000 could eventually find themselves paying as much as £161 a month more, according to figures supplied by the Halifax, Britain's largest lender.