INTEREST rates have been increased for the first time in three years heaping misery on millions of people, as the Bank of England looks to tackle rising inflation.
The Bank today voted 8-1 in favour of hiking interest rates up from their record low of 0.1% to 0.25%.
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Here are the main winners and losers from the change in the Bank of England’s base rate.
Interest rates, or the cost of borrowing, has been at record lows since being cut from 0.75% to 0.1% at the outbreak of the pandemic in March 2020.
But the Bank of England’s monetary policy committee was rumoured to be considering an interest rate rise to help stem the rising cost of living.
Inflation this week soared to a decade-long high of 5.1%, pushed up by soaring energy bills and petrol prices.
The latest rate hike is the first since August 2018, when rates rose from 0.5% to 0.7%.
Interest rates are used to price a range of products by banks, building societies, pension companies and other financial providers.
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Here are the main winners and losers.
Winners
Savers
Savings rates have fallen to record lows in recent years due to low interest rates.
Technically, the rise in interest rates could mean savings deals get more competitive.
There is no guarantee of this though as it is still up to banks how much interest they pay savers.
The small increase is unlikely to offer much solace to savers anyway.
If you had £1,000 in a savings account earning 0.1% of interest, you would earn just £1 in a year in interest.
If that goes up to 0.25%, you’ll earn £2.50 a year in interest.
Santander was one of the first banks to announce it would increase savings rates in line with base rate.
Savers will earn an extra 0.15 percentage points from January 12.
Laura Suter, head of personal finance at AJ Bell, said: “Even with interest rates rising, savers need to be aware that inflation is rising faster.
“No cash account will beat inflation currently, so you really need to question whether you need your money in case or whether you could consider investing some.”
The top easy-access savings account currently pays 0.71%. If that increases in line with base rate to 0.86%, even someone with a £5,000 savings pot would only earn an extra £7.50 a year in interest.
Retirees
Pensioners have been hit by falling interest rates as it influences the pricing of annuities.
Retirees can use their pension to purchase a regular income by taking out an annuity.
This hasn’t been attractive in recent years due to low interest rates.
But annuity providers could increase their payments in line with the interest rate increase, which could make this option more attractive to retirees.
However, it’s also been pointed out that retirees on a fixed income already could be hurt by the rate hike as their outgoings are likely to increase.
Losers
Home owners on tracker mortgages
Tracker mortgages charge an interest rate that follows the Bank of England base rate.
It is usually a few percentage points above the base rate.
That means if the rate drops, your monthly mortgage repayments get cheaper – but your payments will also rise if rates increase.
Mortgage borrowers on tracker deals will now see an increase in their monthly repayments and you will be contacted by your lender about when the higher payment will start.
Around 850,000 borrowers are currently on a tracker mortgage.
UK Finance estimates that an increase of 0.15 percentage points will add an extra £15.45 to monthly repayments.
Meanwhile, the 1.1million homeowners on their lender’s Standard Variable Rate (SVR) will see an average of £9.58 added on to their monthly repayments.
Mortgage borrowers
Mortgage lenders price their products based on interest rates.
If rates are low, the money is cheaper for banks to access and lend.
Borrowers have benefited from this in recent years and mortgage rates have fallen to record lows, but this could all change now that base rate is rising.
According to Nationwide, if you had a 25-year mortgage of £100,000 at 2.05% and your rate increased by 0.15 percentage points, it would add £7 to your monthly repayment.
Those with a £200,000 mortgage, would see £15 a month added to their monthly repayments – £180 a year.
While those with a £300,000 mortgage would pay an extra £22 a month, or £264 a year.
Charles Rose, director of Mortgages at UK Finance, said: “For thor those who have come to the end of their mortgage deal, a wide range of products are available and we encourage homeowners to shop around.
“Any customers with concerns about managing their mortgage should contact their lender, who will be able to explore the range of individual support options available.”
It’s worth remembering that homeowners can usually remortgage six months before their current deal ends, so you don’t have to wait if yours finishes next year.
Credit card users
Interest rates on credit cards are already high, with annual percentage rates of more than 20% in some cases.
Providers could use this latest hike to justify higher charges.
According to Moneyfacts.co.uk, credit card users with a balance of £3,000 would pay £4.86 more in interest over 18 months to clear their debt if the interest rate on their card goes up.
It’s a reminder to anyone with debt on a pricey credit card to switch to a 0% credit card if possible, or speak to their provider if they are struggling with repayments.
Meanwhile, anyone in their overdraft will also pay more in charges.
Karl Tippins, financial expert at Pension Times, said: “Many pensioners and low income families rely on their overdraft towards the end of the month to help ends meet.
“This could now leave some families going without because they simply can’t afford the interest rates.”
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