How will higher interest rates affect you?

http://www.theguardian.com/money/2015/jul/18/how-higher-interest-rates-affect-you

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The era of ultra-low interest rates will soon be coming to an end, with Bank of England governor Mark Carney warning of the first rate rise at the turn of the year. But he also said that rates are unlikely to return to the 5%-plus that was common before the financial crisis. The new normal may be closer to 2.25%- 2.5%, he hinted. But what will rate hikes mean for your personal finances – and what can you do about it now?

Mortgages A 0.5% rise in base rate will add £38 a month to the typical £150,000 mortgage, assuming the homeowner is on a deal such as Nationwide’s 2.5% tracker loan, where borrowers pay base rate plus 2%. If base rate keeps on rising through 2016 and 2017 to hit 2.5%, the pay rate on the Nationwide loans will be 4.5%. For someone with a £150,000 mortgage it means the monthly repayment will jump from £673 today to £833. Our table shows what it will mean for other loan sizes.

Mark Harris of mortgage broker SPF Private Clients says: “If you are on a variable rate, and would struggle to pay your mortgage if rates rose, it is worth locking into a fixed rate. There are some really cheap deals on the market, with two-year fixes starting at 1.05% and five-year fixes from 2.14%. In all likelihood we have now seen the cheapest of these fixed rates, so don’t delay if you want one of the more competitive deals in the hope that a better rate will come along. It probably won’t.”

Yorkshire, the West Brom and Chelsea building societies have some of the cheapest fixed-rate deals. If you only have a small deposit then HSBC and Yorkshire Bank have good deals.

Adrian Anderson of mortgage broker Anderson Harris says: “Five-year fixes look particularly good value, but don’t fix for that long if there is a chance you might move in two or three years – or you’ll be hit with a hefty penalty.” Yorkshire building society has a five-year fix at 2.18% if you have a minimum 35% deposit, while Yorkshire Bank has a 3.49% fix for buyers who can only stump up a 10% deposit.

Savings A rise in the Bank of England base rate must be good news for savers, right? Well, not necessarily.

Savings rates are not going to rise across the board by any means

“The traditional relationship between the Bank of England base rate and savings rates has been severed for some time and we don’t think it will necessarily be restored,” says Anna Bowes of savingschampion.co.uk.

While savings rates started to fall as the base rate came down during the economic downturn, thousands of savings rates have been cut since 2009 when there has been no change in the rate.

These cuts increased dramatically from summer 2012 when the government introduced funding for banks that meant they no longer needed to rely on savings deposits for capital. Just before the Funding for Lending scheme started the best easy access account paid 3.25%; now it pays 1.6%.

Andrew Hagger from the moneycomms website says some providers will look to increase their profit margins by not putting rates up when the Bank of England does so. “Savings rates are not going to rise across the board by any means,” he says.

So what should you do? Bowes believes that savers should largely disregard the anticipated rise in the Bank rate and concentrate on what’s available now. They should go for a balanced portfolio, she says, and this should still include locking some money away for as much as five years.

“I know people’s instinct will be not to lock in for a long time, but the key point is that there is no guarantee that because Bank rates are going to rise five-year fixed rates will do the same,” she says.

She adds: “Fixed rates don’t follow base rates – they have already factored in expectations of a rise. All the time you wait is time you’re missing out on the higher interest rate these accounts offer.”

The best five-year fix, from Paragon Bank, pays 3.06% – almost double the best rate on an instant access account. If you would rather fix for a shorter period, Paragon also tops the table with a fixed-rate bond paying 2.07% over a year. The best instant access is from BM Savings – part of the Halifax – which pays 1.6%.

Personal loans and credit cards

Personal loan rates hit a record low in the spring, with the average rate on a £10,000 advance falling close to 4%. Most personal loan rates are fixed, so if you have locked into a deal you will not see the cost rise before you have paid it off.

Hagger says he doesn’t expect a base rate rise to mean an immediate increase in the price paid by new customers. “As soon as we get a rise I think rates will bottom out, but the market is so competitive that I don’t think providers will want to raise prices straight away,” he says. “They will probably absorb a 0.25% rise to stay at the top of the tables and only start edging up if we see more increases.”

Credit card rates are not usually explicitly linked to the base rate – although in 2013 Halifax told customers that it would raise the rates on its plastic in line with any increase by the Bank.

Rates for existing customers typically didn’t fall when the base rate did, and Hagger said he didn’t expect card providers to raise them in line with any increases.