It seems like we have been talking about an increase in interest rates for some time now. Although we seem to have had a ‘close call’ today with the Monetary Policy Committee voting 7:2 in favour of holding rates at the historic low of 0.1%, they did comment that interest rates could rise “from now onwards”.
I think we have reached the point of ‘when’ and not ‘if’ interest rates will rise and it seems it will only be a matter of weeks.
This may come as a relief to savers, who will be pleased to see the meagre rates paid on savings increase, even if only slightly.
Borrowers on the other hand beware. The cost of borrowing will most likely climb faster than the ‘official’ Bank of England Base Rate as lenders try to price in future interest rate increases as well.
With this said, the Bank does not expect rates to be above 1% by the end of 2022 – still ridiculously low by historical standards. If you had offered a mortgage borrower a sub 1% rate back in 2006, I am sure they would have taken your right hand off!
So, what financial planning actions can we take now to prepare for the seemingly now inevitable rate rise?
First off, for savers, you may wish to avoid locking into any long-term products or bonds. It seems very likely that the rates available on these longer term savings products will go up in the coming months in line with interest rates, so it may be sensible to park some cash in an easy access account for a few months and see what deals come along in the new year.
Borrowers on the other hand should consider the opposite actions – think about locking in for as low and as long as you can. It may even be worth paying an early repayment charge on an existing mortgage to access a new, lower, fixed-rate deal, but of course this will require careful consideration. We have been saying it for years, but I think we may now look back and see this current era as the lowest mortgage interest rates have ever been and ever will be.
As always, if you need any assistance with your own financial planning, please don’t hesitate to contact a member of the Buckingham Gate team.
