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Interest rates: What would a rise mean for you? Interest rates: What would a rise mean for you?
(2 months later)
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. Despite the fact that inflation dropped in March, most economists still expect the Bank of England to raise interest rates in May.
Any such rise would produce both winners and losers. The likely rise - from 0.5% to 0.75% - will be relatively small, and for the vast majority of householders, not particularly painful.
Nevertheless there will be both winners and losers.
The winners could include 45 million savers, who have already seen interest rates begin to tick up after the previous rise in November.The winners could include 45 million savers, who have already seen interest rates begin to tick up after the previous rise in November.
Those planning on buying an annuity to finance their retirement are also likely to benefit.Those planning on buying an annuity to finance their retirement are also likely to benefit.
But at least four million households with variable or tracker rate mortgages are likely to see their payments increase once again.But at least four million households with variable or tracker rate mortgages are likely to see their payments increase once again.
Variable-rate mortgagesVariable-rate mortgages
Across the UK, 9.2 million households have a mortgage.Across the UK, 9.2 million households have a mortgage.
Of these, about half are on a standard variable rate 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 would be most affected, as their monthly payments would 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.
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.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 mortgagesFixed-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 about 4.5 million households.Currently half of all outstanding loans are on fixed rates, equating to about 4.5 million households.
Such rates have already started to rise since November's rate increase, and are now likely to tick up further over the coming weeks. Such rates have already started to rise since November's rate increase.
Of course none of these borrowers would see an immediate rise, even in May.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
In theory, saving rates should begin to rise, in anticipation of any rise in May. When base rates rise, so do savings rates, in theory.
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. But it depends on the extent to which banks and building societies want to increase their deposits.
So 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.
According to the Bank of England, returns on cash Individual Savings Accounts (ISAs) actually fell in December.According to the Bank of England, returns on cash Individual Savings Accounts (ISAs) actually fell in December.
While savers could expect returns of 1.47% in October, that fell to 1.23% in December. Yet they jumped significantly in January, with average returns on cash ISAs going up from 0.36% to 0.94%.
So savers should not start celebrating. In February and March they held steady at 0.86%.
However, competition for savers' deposits may increase in the months ahead, and this could have a beneficial affect on saving rates.
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.
Now the banks may have to turn to savers instead.
AnnuitiesAnnuities
Any rate rise might also good for retirees buying an annuity - a financial product that provides an 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 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.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, by December the figure had risen back to £4,468.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.