Rising interest rates: the pain and the gain

Savings

So as widely expected, interest rates have risen to 5.75pc today – the fifth rise in a year.

Rising interest rates are often seen as being a bad thing, and if you have a mortgage, that is certainly the case. However if you are a saver or a pensioner without a mortgage, rising interest rates bring good news.

In this article, we'll look at the pain and the gain associated with interest rate increases.

Interest rate pain

Let's get the pain out of the way first, and if you have a mortgage, this fifth rate rise is probably starting to hurt, although the pain may be delayed if you have a fixed rate mortgage.

As rates have risen by 0.25pc, you are now £16 per month worse off for every £100,000 borrowed on a repayment mortgage.

£16 per month doesn't sound too bad, but when you multiple that by 5 for each of the recent rate increases, then you are now £80 per month worse off and that is only for a £100,000 mortgage. Ouch!

If you are surrounded by the warm glow of holding a fixed rate mortgage taken out at 4.5pc two years ago, you needn't worry about this rise today.

Yet.

Unfortunately your fixed rate term will probably end within the next year and you will be looking at large increases in monthly repayments – possibly around £150 per month.

Reducing the pain

Being sensible about borrowing is key when rates rise as they have done. Interest rates are still relatively low, compared with the late 80's but what people don't realise is that house prices in real terms have increased dramatically.

This means that although rates are low, mortgages are far larger than they were ten years ago so small rate changes still have a larger effect on monthly costs.

Wherever possible, you need to get your borrowing down, particularly if you will be coming out of a fixed rate term soon.

If you are being sensible, then any spare cash at the end of the money, or part of a bonus, should be put against your mortgage as an over-payment. This is as long as your mortgage rules allows small overpayments. Most do, but check with your lender first.

Making regular overpayments has a dramatic result. For example, if you overpay your £100,000 mortgage by as little as £50 per month then you have just negated the last two interest rate rises. Your mortgage payments will go down so overpay some more!

Interest rate gain

And now to the gainers when rates rise, and there are many thousands who are now better off as a result.

Those with savings, particularly with more savings than borrowings are winners in times of high interest rates. Banks and building societies are falling over themselves to win your business as a saver and saving rates are rising as a result.

You can currently get rates of over 6pc (6.15pc at Cahoot) for accounts with 90 day access and these rates should now increase as a result of the 0.25pc rise today.

Forget about loyalty to your bank. If they don't increase their savings rates soon, in line with this rate rise today, then switch to a bank with better rates. Your savings are important so manage them as well as possible.

Cash is king

When saving rates for accounts with long notice periods start to exceed 6pc,as they do now, then you have to seriously consider if money is better placed in a bank account rather than property. The benefits are dependent on your personal circumstances, but you should consider the options carefully.

House prices will probably start to slow – if they don't then expect yet another rate rise soon – so now might be the time to reconsider an investment in property. You could get more return in the bank, particularly when considering the costs of arranging investment mortgages.

As interest rates rise, then other forms of investment need to evaluated against the rates achievable in long term savings accounts.

Cash is king when rates are high and there are real gains to be had.

Add Comment