Ready your finances for 2017

£50 notes on a clothes line © iStock
Don’t find yourself hung out to dry if rates go up

The changes that we expect over the next year could have an unusually big impact on your finances. After a long period in which interest rates and inflation have both ticked down, any reversal of this trend will have repercussions for both savers and borrowers.

The Bank of England base rate, which banks and building societies use as a benchmark when setting their interest rates, sat at a record low of 0.5% for seven years, until it was cut to a fresh low of 0.25% in August 2016. However, it seems likely that this will mark the bottom of the cycle – while interest rates have gone lower and even turned negative in certain countries, the Bank does not seem inclined to go down the same route.

So the big question is how fast and how far rates will go up. If inflation picks up, a base-rate rise is likely to happen sooner than many expected. This seems quite plausible: the Bank of England has forecast that inflation will hit 3% by the end of the year as a result of the plunging pound and fears of a “hard Brexit”.

This should mean banks start to offer higher rates again, so think carefully before opting for long-term fixed-rate savings accounts. At present, locking your money away for five years will get you an interest rate of around 2% at best – just 0.6 percentage points better than a one-year fixed-rate account. Factor in the possibility of inflation at 3% (meaning the value of your savings would lose 1% per year in real terms) and the appeal of long-term fixed-rate deals is limited. Stick with a shorter-term account, so that you’re in a position to switch sooner if inflation takes off and interest rates rise.

Conversely, homeowners should consider fixing their mortgage now. The best mortgage rates look compelling, with two-year fixed-rate deals at around 1%. Someone with a £200,000, 25-year mortgage switching from a 4% rate to 1% would shave £302 off their monthly repayments and save £90,500 over the life of the mortgage (before fees). Five-year deals of less than 2% could be an even better option if you expect rates to rise more rapidly. Fix now to lock in the most favourable rates we’re likely to see.

What other changes will we see next year?

• In April, the new inheritance tax (IHT) allowance for family homes will arrive. The first £100,000 of the value of your main home will be exempt from IHT when left to your direct descendants. This is an additional tax break on top of every individual’s £325,000 allowance and is set to increase to £175,000 by 2020/2021.

• The new tax year also brings a significantly increased individual savings account (ISA) allowance. In the 2017/2018 tax year, you will be able to save up to £20,000 across a cash, investment or innovative finance ISA, up from £15,240 at present.

In addition, a new type of Isa joins the family in 2017. If you are aged between 18 and 40, you will be able to save up to £4,000 a year into a Lifetime Isa (Lisa), and the government will add a 25% top-up each year. You can keep your Lisa in cash or investments, and the growth will be subject to the same tax rules as other Isas. You can use money saved into a Lisa either to buy a first home (worth under £450,000) or for retirement once you’re over 60.

• The personal allowance, the amount you can earn before you have to pay income tax, will increase by £500 to £11,500 in the 2017/2018 tax year. The basic rate limit will also rise to £33,500. These changes combined mean that the higher-rate threshold, the amount you earn before you are subject to the higher income-tax rate of 40%, will increase to £45,000.

• From 1 June, insurance premium tax – the equivalent of VAT on insurance policies – will increase to 12% from 10% at present. This is the third hike in 18 months. So if you have a policy due for renewal in June, you may want to consider renewing early.

In the news this week

• UK banks may be required to add a checking system to their online banking websites that will help people avoid accidentally transferring money to the wrong account, says Ali Hussain in The Times. Currently, only a sort code and an account number are required to transfer money, so a simple mistake in one of these can result in money being misplaced. However, under plans announced last week by the Payments Strategy Forum, an industry organisation, customers would have to provide the name of the intended recipient, so that this can be verified against the other account information.

A screen will then pop up before the money is sent, asking the payer to double-check the information, decreasing the likelihood of them making an error. “The confirmation of payee system… will allow people to avoid sending payments to the wrong account, either by accident or being tricked into doing so, by ensuring a confirmation of the recipient is sent to the payer before any funds leave their account,” Ruth Evans, chair of the forum, told The Guardian. However, the new rules may not come into effect before 2020.

• Market Harborough Building Society has launched a new mortgage aimed at first-time buyers who are struggling to put together a deposit towards a house purchase, says Olivia Rudgard in The Daily Telegraph. The building society’s new 100% mortgage will allow buyers to borrow the full value of their house purchase. However, it will require future homeowners to have a parent register a second charge against their own home, meaning that the parent will be liable if the borrower defaults on the mortgage. 

While 100% mortgages have become rare since mortgage regulations were tightened in the aftermath of the global financial crisis, a few other banks also offer specialist mortgages that are intended to help buyers who are not able to build up a large deposit. Barclays allows first-time buyers to take out a 100% loan if a 10% deposit is left in a linked savings account belonging to a parent. And Santander allows buyers to take out a personal loan to cover their deposit on top of their mortgage – a product that’s mostly aimed at high earners who may only have a limited amount in cash.