The Ripple Effects of the Rise In Interest Base Rates
Worried about the rise in interest base rates? You're not alone.
This year has been a barrage of bad news for homeowners, with skyrocketing energy costs, spiralling inflation and consecutive interest rate rises. No matter the size of your home, the bills you'll be unwrapping this Christmas will be much higher than last year's.
If you're a homeowner or thinking of becoming one soon, the latest interest rate hike will affect you. In this article, Million Pound Homes breaks down what the interest rate means for you and the ripple effects this increase will have on the housing economy.
What is the Bank Rate?
Firstly, let's dive into what exactly the rise in the bank rate of interest means.
The Bank Rate is the most important monetary economic figure in the UK. The Bank Rate, or the base rate of interest, is set by the Bank of England (BofE) and informs the interest rates from other organisations across the UK. Recently, the BofE and the government have increased the bank rate. The BofE's Monetary Policy Committee voted on December 15th to raise the base interest rate from 3% to 3.5% — the highest for almost 14 years.
This increase has not come out of the blue but was widely anticipated by economists. The impacts of this increase will be felt by consumers and businesses alike, with savers likely to benefit from higher deposit rates but borrowers facing increasing costs for borrowing money.
The ripple effect of interest on homeowners
So, what could this mean for you?
Unfortunately, the average homeowner is likely to lose out. An increase in base interest rates will affect most mortgages immediately. If you're on a fixed mortgage, you may be granted a temporary reprieve as your rate will be fixed until the end of the term. After that, though, it's likely you'll see an increase. If you have a tracker mortgage or a standard variable rate mortgage, you'll likely see an increase in your next repayment.
If you were looking at making home improvements or selling your home, this may also impact your plans. Loans and new mortgages are likely to see an increase in their premiums due to higher interest rates. Similarly, you may notice fewer buyers wanting to buy your property as fears of high mortgage repayments are allayed.
It's not just mortgages that will be affected, though. If you're a renter, this increase will likely impact your monthly rent payment as your landlord passes the increase on to you. Unlike mortgage repayments, this is unlikely to happen overnight, but when it comes time to renegotiate your contract, look out for rent increases.
Is there an upside?
The good news is that interest rate rises aren't all negative.
If you're saving for renovations or, indeed, for a deposit on a new home, you'll likely see higher annual returns on your cash savings. Our advice is to hunt around for the best deal on a savings account, especially if you're looking to buy in a few years.
Of course, this positive comes with a caveat. If inflation rates remain double-digits, the money in your savings account will lose value over time despite this latest interest rate hike. It only makes sense to keep money in cash savings if you are likely to need that cash in the short term. For higher rates of return, investment opportunities are key.
This brings us to our second upside to the interest rate increase. If you can afford it, now is a great time to invest in property. It's an oft-repeated adage that most millionaires are made during a recession and this latest interest rate increase presents an opportunity for those with the wherewithal.
High interest rates combined with inflationary pressures will keep housing prices stagnant for a while, but drive rental income up. Many renters will face these pressures on their wages, meaning they have less purchasing power over time. Scraping together the lump sum to buy a property, plus keep up with increasing mortgage repayments, will mean that many more renters will be forced to remain renting for longer. For landlords and homeowners on the other side of the coin, this could be a lucrative opportunity.
Our final thoughts: the rise in interest base rates
The next few years are likely to be turbulent ones in the housing economy. High interest rates mean skyrocketing mortgage repayments that may leave many homeowners struggling to make repayments. This, alongside inflationary pressures unseen in a generation, means that many ordinary people will struggle financially in this coming year.
Yet where there are losers, there also must be winners. Recessions maketh the millionaire, and this latest interest rate hike indicates an economy where opportunities abound. If you're considering investing in a second property or moving to a larger home, you may find that these interest rates work in your favour.