The Bank of England raised interest rates by 0.25% to 0.5%, the first rise in more than a decade.
This may seem like a small move; however, it will have an immediate impact upon personal finances. Those with mortgages and other borrowing will face higher costs but for those with savings it will offer some long-overdue welcome news.
Will deposit rates improve?
Anyone who has held savings for a number of years will be acutely aware of how low rates have been. If you have been able to match or exceed the rate of inflation with savings you have done very well.
So, it is surely good news that the base rate has risen, isn’t it…? Unfortunately, it may not be that simple. We don’t know how banks are going to react because it has been such a long time since the markets have seen a rate rise.
If you are in the market for a savings account it may be sensible to stand back and wait for the dust to settle before committing.
Will my payments go up?
If you have a mortgage on a variable rate you are likely to face higher monthly bills as lenders are expected to raise interest rates on home loans.
The main groups affected in the short term are those on standard variable rates and those with tracker mortgages, where rates are likely to rise for existing borrowers.
A quarter-point rise on a 20-year mortgage of, for example, £100,000 at a standard variable rate of 4% per cent means an extra payment of about £164 a year.
Will it affect annuities?
Annuity rates are linked to movements in interest rates and the rise is expected to feed through to higher incomes for those people buying an annuity.
Annuity rates are underpinned by gilt yields and the base rate rise is likely to boost these. However, gilt yields remain historically low so anyone considering purchasing an annuity ought to fully investigate all the available options before committing.
What about Defined Benefit pension transfer values?
Rising interest rates may signal an end to the record high transfer values that have been on offer to members of defined benefit pension schemes. Members of these schemes have received offers of 30 to 40 times their projected pension income as a lump sum.
Anyone considering transferring from a Final Salary scheme may want to look at this sooner rather than later. It is vitally important to take impartial advice and weigh up the pros and cons before transferring.