The Bank of England yesterday decided to increase base rate – the first upward move for 10 years. But it’s hardly time to light the sky up with celebratory fireworks, is it? After all, the Bank has just done what we all thought it would. And remember, it’s only gone up from 0.25% to 0.5%: it’s just moving back to the level it was last year. It’s hardly gone skyrocketing, has it?
And while an increase in base rate should be good news for savers and bad for borrowers, actually the impact of this rise is pretty small. There’s no rule that says banks have to pass on the full rate rise to savers and borrowers – the Bank of England might set the rate but banks make their own decisions on what to do. And even if savings rates went up by the full 0.25% the impact would be small. On £10,000 savings it means just an extra £25 a year interest. And given that the typical savings account only pays around 1.5% then the extra 0.25% is not going to help fight the impact of inflation. With inflation at around 3% no savings account can hope to keep pace even after the latest base rate increase. And don’t think the rise is an indication that it’s going to carry on climbing. As the Bank of England governor Mark Carney has said that the committee expects to put rates up only two more times by 2020, savers aren’t going to get much higher rates for ages.
Those with mortgages will not welcome the rate rise. But actually, the effect is small. Only those with variable rate mortgages are going to be affected: far more than half of borrowers are on fixed rates which do not move whatever happens to rates. Even for those affected an increase of 0.25% adds just £22 a month to the monthly cost of a £180,000 mortgage with 20 years to go says Defaqto. If you take anything from this latest rate rise, it’s that if you are on a variable rate deal you should look at moving onto a fixed rate now. Current fixed rate deals have already taken this rate rise into account: and they are still good value. You can fix for five years at 1.67% with Chelsea Building Society (check out a good fee-free mortgage broker for current deals: we like London & Country).
The other main consequence of the rate rise so far is that the pound has dropped in value. While that’s good for businesses which export overseas (because their products are cheaper for overseas buyers) if you are planning on a holiday abroad it’s bad news. Certainly no excuse for fireworks – not even a sparkler.
See our guide to mortgages here