The Bank of England has just raised interest rates – to 0.75%. Might as well make the most of it, says Ruth Jackson.
Last week, the Bank of England put up its base interest rate by 0.25 percentage points to 0.75%. It’s the highest that interest rates in the UK have been for nine years (although still very close to their lowest level ever). So what effect might this have on your personal finances?
It’s been a long time since people have been able to get any kind of meaningful interest rate on their savings accounts, with most of us accepting that we’re not going to be able to beat inflation (currently 2.4%), unless we’re happy to lock our cash away in a fixed-rate account for a fairly long period. And that might not change for quite some time. The Bank of England “bank rate”, as it’s called, is the rate it uses for lending to other banks, and is used as the benchmark for interest rates generally. So you might well assume that when it rises, the rate paid on your savings is going to rise too. But don’t get your hopes up – some banks may pass on part of the rise, but others will make no changes to their rates at all.
Whatever happens, it won’t be immediate. The last time the Bank raised the bank rate, back in November 2017, it took around a month for savings accounts to put their rates up, and many banks only really paid lip service to the rise. First Direct passed on just a 0.1% increase in some cases, Halifax 0.15% and HSBC only added 0.2% to its online bonus saver (and also still offers an account paying just 0.05%, according to comparison site Moneyfacts). This time around, Nationwide has already said it won’t pass on the full rate rise to savers.
So you should use this opportunity to shop around for the best deal. Make sure to look beyond the high-street banks as well – challenger banks often offer better rates, and some building societies also offer competitive rates.
For now, the best easy-access rate is currently 1.4% from Coventry Building Society, while the best fixed rate is 2.76% for a seven-year bond from Secure Trust Bank. However, it’s a good idea to wait a couple of weeks before locking your money away, to see if the rate rise brings any better deals to the market (and who knows where interest rates will be in seven years?).
What about my mortgage bills?
While banks are slow to pass a rate rise on to savers, funnily enough they don’t hang around when it comes to upping rates for borrowers. The first to be hit by the rate rise will be the 3.5 million people on variable-rate or tracker mortgages. Tracker mortgages automatically rise in line with the bank rate, so customers can expect to see their repayments go up immediately in many cases, although some lenders won’t introduce the rate increase until September.
Mortgage lenders could also use the rate rise as a reason to increase their standard variable rates (SVR) – these are rates which a lender can raise or lower at any time. If you don’t switch to another deal, this is generally the type of mortgage you will go on to when your fixed-rate mortgage deal comes to an end. So far, Barclays, Co-op Bank, Lloyds, Halifax, the West Brom and Skipton Building Society have all said they will increase their SVR by 0.25 percentage points. As it stands, the average SVR is 4.72%, according to Moneyfacts.
Fixed-rate mortgage deals are currently among the cheapest they have ever been, but keep in mind that this may not last much longer after the rate rise. Just now, the average two-year fixed-rate mortgage charges 2.5%, from 4.5% in 2011.
Finally, the interest-rate rise could result in higher retirement incomes. Rates on an annuity – an insurance product that provides you with a guaranteed lifetime income – follow the yields on gilts (government bonds) and any increase in the bank rate should result in higher gilt yields, which will in turn lead to higher annuity rates. If you are buying an annuity, remember to shop around – you should get a far better deal for your money that way.