Should I Be Worried About “An Interest Rates Hike”?
And why should I care anyway?
The rumor in the market is that interest rates could go up. What is it all about, and why should you be, well, interested?
What is an Interest Rate?
An interest rate is the cost of borrowing money. It’s a percentage of the total amount borrowed.
Who decides and Why?
Bank of England and its Governor, Mark Carney, employ a committee of monetary policy experts who all vote on what the “base rate” of interest should be in order to stabilise inflation and keep the country’s finances healthy. This base rate is not a prescription for every high street bank or lender, but it heavily influences how much lenders charge, so if it goes up one year, the cost of borrowing will go up for all of us too. The current rate is 0.25 per cent. The processes of the Bank of England are actually quite intriguing, since they straddle global politics and national business (and all take place in a particularly lovely old building in the city) so if you want to read more, check out their informative website.
How can it impact me?
- A strong pound:
If interest rates go up, the value of the pound follows. This is because foreign investors will want to deposit funds in British banks as they will get a good return on their money. Ergo, sterling becomes more attractive. This benefits the private purse in all sorts of ways, from buying holidays and exchanging foreign currency, to the investment portfolios we hold. Your pension fund, your ISA and any other stock market dependent savings platform are all affected by the strength of our currency.
- Mortgages and loan rates:
Interest is all about borrowing (err, unless it’s about saving, which works in broadly the same way), so this is where rate fluctuation hits hardest. You may not take out a personal loan just to buy that new Hermes handbag, but we all need mortgages.
According to the Bank of England, just under half of UK homeowners have “tracker” mortgages, which means they follow interest rates (if rates rise, mortgage payments rise). However around 57% are on fixed rate mortgages, so they won’t be affected by interest rate changes. At least not immediately.
Understanding and following how borrowing rates are set will enable you to make better choices when it comes to taking out a new mortgage. But surprise, surprise, it’s not entirely straightforward. Much depends on how much you initially borrow. If you’re a new homeowner, borrowing a really large amount, no fixed rate mortgage will protect you from higher repayments in the long term. The BBC Business website has a useful article on this.
What are people saying?
The word on the street is that we can expect an increase in the interest rate from 0.25% to 0.50% when the Bank of England’s Monetary Committee releases their new policy next month.
Those in the know say that this first rise in a decade is because of an increase in labour costs (2.4% year-on-year in the second quarter of 2017) which could show a stronger economy.
Credit photo: Fabian Blank on Unsplash.com.