The last few years have been full of bleak news from the pandemic to international unrest to the current energy crisis. Now countries around the world are facing rising inflation and increasing interest rates.
Interest rates are a key tool for Central Banks in trying to combat rising inflation and in protecting a nation’s currency. Raising interest rates can help lower inflation because higher interest rates tend to encourage more people to save than to spend. In time, this should bring down the price of goods and services, thereby lowering inflation.
Read on to find out how rising interest rates can affect each area of your personal finances and steps you can take to help keep your wealth safe.
1. The cost of your mortgage repayments may increase
If you have a mortgage, this is the biggest area of cost you’re likely to face. However, the type of mortgage you have will influence how quickly the interest rate rise will affect you.
Fixed-rate mortgages
If you are on a fixed-rate mortgage, the amount you pay each month will remain the same, so you will not be immediately affected by the interest rate rise.
However, when your fixed term ends, any new mortgage deals you take out are likely to be more expensive.
If your fixed term is due to end within the next three to six months, it may be prudent to start looking for new deals now. You can sometimes secure a new mortgage arrangement up to six months in advance, which could help you beat any further interest rate rises.
Standard variable rate mortgages
A standard variable rate (SVR) is set by your lender, and an interest rate rise will usually affect the rate charged.
Whether you are on an SVR mortgage or a discounted variable mortgage (often the lender’s SVR minus a fixed percentage), you will notice an increase in your monthly repayments over the coming weeks. Your lender should contact you and outline the exact increase you should expect.
If you are on your lender’s SVR, you can change deals at anytime. So, now may be the right time to invest some time shopping around to see if you can save with a different mortgage arrangement, especially with further interest rate rises expected in the coming months.
Tracker mortgages
Tracker mortgages are modelled to track the base rate, so you’ll see your monthly repayments go up in line with the interest rate rise almost immediately.
At the time of the last interest rate rise in September, the Times Money Mentor reported that: “A typical homeowner with a £400,000 mortgage on a tracker rate will see their monthly payments jump by £99 – or £1,188 a year.”
Unlike SVR mortgages, if you want to switch away from your tracker mortgage to a different deal, you may be faced with an early repayment fee.
This means that it’s important that you read the fine print on your contract before deciding to switch. The fee you may have to pay to exit early may mean it isn’t going to save you money by exiting early. You may be better off waiting until your current term finishes. If this is the case, perhaps pop a note in your diary to look again a month or so before your current arrangement ends.
To combat rising interest on your mortgage repayments, it may be worth considering using surplus cash savings to pay debt down early and reduce your long-term obligations.
Whatever you decide, professional advice can be invaluable.
Although we don’t advise on mortgages, we can refer you to local experts in your country who will be happy to help. They will discuss your concerns and requirements and recommend the most suitable steps considering your financial circumstances and long-term plans.
2. Pension savings may be affected in the short term
Pension pots will often grow when interest rates rise, this is particularly true if funds are invested in bonds. However, if your pension is invested in the stock market, the value of the funds you are invested in may dip.
Depending on how close you are to retirement, this will affect you differently.
If you are more than 10 years away from retirement, the effect of the current base rate rise shouldn’t have a substantial impact on your final pension pot, even if a lot of it is invested in stocks and shares. This is because you still have plenty of time for the stock market – and your pension savings – to recover.
If you are approaching retirement and beginning to think about accessing your pension, it might be useful to speak to a financial planner about how best to protect your pension from the effects of current events.
3. Borrowing will become more expensive
While existing loans, such as car finance, will not be affected if you agreed to a fixed rate when arranging the loan, taking out new loans may be more expensive in light of the higher interest rates.
Make sure you understand the details and read the small print with care if you take out a new loan, and encourage family members, such as children, to do the same.
4. Savings will benefit from higher interest rates
Interest rate rises should prove to be good news for savers, because rising interest rates usually result in higher savings rates.
However, it is important to consider the increase in interest rates alongside the increase in inflation since the rate on savings accounts is failing to keep up in the current environment.
According to Moneyfacts, the highest interest rate on an easy access savings account in the UK as of 19 October 2022 is 2.55%. While this has risen in recent weeks, it is still lagging a long way behind the UK rate of inflation, which was 10.1% in September 2022.
Of course, we advise everyone to keep an easy access emergency fund but if you are wondering how much you should really hold in cash, speak to a financial planner. A professional planner will help you understand alternative ways to grow your savings so that your buying power does not diminish with inflation each year.
5. Investments should beat interest rates on savings and help protect your buying power over the long term
While rising interest rates affect consumers, they also affect companies.
Companies that are especially vulnerable to consumer spending habits could see sharp drops in value. Rising interest is also likely to cause some companies to struggle to secure financing or leave them overly exposed to servicing large debts, which will also have a negative effect on their value.
Over time, equity investing is often a good hedge against the effects of inflation on the stock market. While there will always be short-term fluctuations, if you remain calm and maintain your investment, then equity investing is likely to help protect your portfolio against the effects of inflation.
It’s important to get the right advice to help you navigate tricky periods.
Remember, uncertainty can also lead to opportunity. Periods of economic downturn offer unique opportunities to strike while prices are at their lowest. If you wait to buy and the market recovers, you could miss out on benefiting from competitive prices.
Buy in a cautious and phased way, staggering and diversifying your investments. One effective way to do this is through regular investing, which you may have read about in our previous article.
A professional financial planner can help you build a diversified portfolio that considers your tolerance for risk and is designed to give you a stable foundation to protect you from short-term instability.
Get in touch
If you are concerned about how interest rate rises will affect your finances or want to find out how you can make the most of the options available to you, please get in touch. Email us at enquiries@alexanderpeter.com or give us a call on +44 1689 493455.
Please note
The content of this article is offered only for general informational and educational purposes. It is not offered as and does not constitute financial advice.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
