Five things to do now that interest rates have risen
The Bank of England raised interest rates to one per cent this month, a move that has already sent shock waves through the finances of those with high mortgages or other debts.
But experts are suggesting that further rises are on the way, with current market sentiment suggesting that they will peak at close to 2.5 per cent next year1.
That’s a far cry from the high rates that many of us will remember from the 1980s, but these rises can still have a material effect on our pockets, whatever the state of our finances. It is a good idea to use them as a catalyst to tweak our financial products so we are in the best position possible going forward.
Here are five things you should be looking at doing now.
Check your savings accounts
Inflation is high, which means your money is likely to be losing value in the bank over time, particularly if it is an uncompetitive account when it comes to interest rates.
Many banks have produced more competitive savings accounts in recent months, so there may be scope for better rates for your savings.
Figures from Moneyfacts, the financial data providers, show that rates are rising.
If you have money in uncompetitive savings accounts, you can check on the Moneyfacts website to see if you can get a better deal. It is possible, at present, to get rates as high as 1.5 per cent on easy access money with unlimited withdrawals, so chances are that your money could be working harder than it is.
You can get higher rates on your savings by locking them away for longer, but remember, with rates expected to rise again there could be more competitive savings rates available soon, so you will need to offset this possibility against the current rate availability. There are one-year fixes available at just over two per cent interest at the moment, which could be worth looking at if you know that you do not need the money in the short term.
Reconsider your mortgage
Hindsight is a wonderful thing. With interest rates now higher than they were and further increases priced in, the rates on available mortgages have risen too, so if you were thinking of fixing you rate, you should have done it sooner.
According to Moneyfacts, the average three-year fixed-rate mortgage has now breached three per cent for the first time in seven years2.
However, if you are worried about rising payments, there are still things you can do to insulate yourself.
For a start, if you have savings, you might want to divert some of these into your mortgage (many allow at least ten per cent overpayments per year) if the interest rates you are paying on your debt are higher than the amount you are receiving in interest. If you do this, however, check that you will still have access to the cash you need and that you can borrow back money or take a ‘payment holiday’ if you find yourself short of money later.
If you are still worried about rising rates and are on a standard variable rate or tracker mortgage, it may still be worth fixing. Many SVRs are uncompetitive, and you could find yourself paying less and having more peace of mind.
If you remortgage and can pay off a chunk of your mortgage debt at the same time you may find yourself with better mortgage rates too, as your loan-to-value will decrease.
Take a look at your credit cards
Credit card companies also increase their interest rates when Bank Rate rises. If you have credit card debt and are paying it off slowly, or paying the minimum payment each month, rate rises should prompt you to look for better solutions.
These could include a balance transfer card, where you transfer the money to a card with no interest for a fixed period and then pay it off without the worry of interest payments, or a reprioritising of credit card bills that sees you pay them off monthly rather than letting them mount up.
Make a date
If your mortgage or savings accounts are already fixed for a period of time, you may not be able to change them now rates have risen. However, it is a good idea to make a note of when the rates come to an end, so that you can transfer your products as soon as possible and not be stung with different rates.
You can start thinking about remortgaging around six months before your fixed period ends, so put this date in your phone calendar to remind yourself. Your savings account provider will usually contact you two weeks before your fixed rate matures to offer you new options, including transferring the money to another provider, but it is easy to miss this correspondence so make a note yourself and start researching new possibilities for the money, either by using the Moneyfacts link above or asking your financial adviser.
Review your investments
Investing in an inflationary climate is difficult, and interest rate uncertainty can make the stock market very volatile. A diverse portfolio of geographically diverse companies or funds can help you get through a tricky patch, while a financial adviser can help to reassure you when the market is rocky. Contacting them to make sure your investments are still aligned with your goals is a good thing to do at this time.
2 See forwarded moneyfacts email with mortgage report