What does the interest rate rise mean for you?

Today the Bank of England increased interest rates for the first time in 10 years. The official bank rate has been increased from 0.25% to 0.5%, the first increase since July 2007 when rates hit 5.75%.

So how will you be affected?

Annuities

The rate rise will be good for retirees looking to buy an annuity, or income for life. Annuity rates follow the yields – or interest rates on long-dated government bonds, otherwise known as gilts. With the expectation of the base rate rising, the yields have also been rising, thus giving retirees better value for money when they buy an annuity. Depending on how the market views the likelihood of further base rate rises, annuity rates may continue to creep up.

Savings

The winners of the base rate rise will undoubtedly be the 45 million savers in the UK who are likely to see higher returns from savings accounts.

According to the Bank of England the average easy-access savings account is currently paying 0.14% in annual interest. So, if you had £10,000 in a savings account which is earning £14 a year, if the rate increase is fully passed on you would earn an extra £25 a year, making £39 in total.

While banks always raise mortgage rates immediately, rises in savings rates tend to come later.  Although, banks are not generally chasing after savers cash (they are still benefitting from Government schemes to fund them) so do not expect a sudden rush to increase rates from the banks.

Mortgages

9.2 million households in the UK have a mortgage. Of these around half are on a standard variable or tracker rate. These are the people that will be mostly affected, as monthly payments will increase. Those on fixed interest rates will see no change to their payments during the period the rate is fixed for, however when they reach the end of the term, they may find they may have to make higher monthly payments.

Source: BBC News Nov 17