New interest rates for savers and borrowers

The Bank of England

When the Bank of England announced its new interest rates late last year (from 0.25 to 0.5%) it signalled the first time in a decade that the rate had changed. The increase, while not a cosmic shift in the UK’s economy, represented a concerning jump for those with mortgages. Generally speaking, if you’ve got savings set aside, a rise in interest rates can be treated as good news. If you’ve got a mortgage, though, you may have to repay it at higher interest rates.

When will the new rate take effect?

The new interest rate of 0.5% applied from November 2nd 2017, but if you’ve got a fixed rate mortgage or savings, it will take effect at the end of your “fixed” time period. The typical time range for a fixed rate varies from two to ten years for a mortgage, and one to five years for loans such as Individual Savings Accounts (ISAs) and bonds.

While both lenders and borrowers adjust to the news, there are more rises predicted. According to financial analysts, 2018 could see further increases, going up to 0.75% or even 1.25%.

What do interest rates mean for borrowers?

As mentioned, if you’re on a fixed rate mortgage, new interest rates don’t apply until the end of your fixed period.

For those with variable rate mortgages, changes tend to have an immediate effect, with monthly mortgage repayments going up when interest rates rise. An example of this can be seen with the new rate of 0.5%. Put in to numbers, the new rate represents roughly a £200 annual increase for every £100,000 of your mortgage.

The same can be said for people with other existing loans such as for credit cards and tuition fees, as higher rates will also have negative effect unless the loans in questions are fixed rates.

When interest rates fall, the incentive to borrow money for large purchases like cars and houses increases as repayment amounts tend to be less.

What do interest rates mean for people with savings?

Those on fixed rate saving plans will find themselves in the same situation as those with fixed rate mortgages or loans. The very terms of these saving products mean they won’t necessarily benefit or suffer from a rise or fall in interest rates until the end of the agreed period.

With other savings options like annuities or easy access savings, new rates are usually available straight away. However, this depends on the bank or building society you’re with.

What do interest rates mean for first time buyers?

If you’re thinking about getting a mortgage, changes to interest rates might give you cause to pause. As mentioned previously, the higher the interest rate, the higher your repayments will be. On the contrary, a lower interest rate may be a sign to act now in terms of your house hunt. A potential increase in interest rates can also reduce the amount of mortgage products available, as lenders look to remove lower rate mortgage offers from their product range.

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