What piques our interest in interest rates? Maybe it’s the persistently low rates we’ve endured in the recent past, or the ‘will they, won’t they’ speculation that precedes almost every meeting of the Monetary Policy Committee. Either way, a rise in the Bank of England base rate still tends to be big news these days. But is a rate rise good news for you?
For most people, an interest rate rise is something of a double-edged sword, giving with one hand, whilst taking away with the other. Whether it’s good news for you will depend on your circumstances.
You’d expect it to be good news for anyone with cash savings or a cash ISA, particularly after rates were stuck at historic lows for so long.
However, celebrations are somewhat muted when savers do the sums. A 0.25% rate rise gives a saver with a £20k pot, for example, an extra £50 return1 per year. This assumes all the benefits of a rise are passed on to the consumer, which is by no means a given.
Meanwhile, a homeowner on a typical standard variable rate mortgage of 4.56%2 with a £200k outstanding balance and 25 years remaining, can expect around £28 to be added to their monthly repayments for each 0.25% base rate rise. So, just one rate increase will add £336 to someone’s annual mortgage repayments, dwarfing any savings boost and limiting those who meaningfully benefit from a rate rise to those enjoying a mortgage-free lifestyle.
Still, it’s always important to have cash savings as a quick-access emergency fund for those unexpected expenses.
But as long as inflation continues to outpace the vast majority of interest rates available on the high street, a base rate rise here and there is barely going to scratch the surface for those looking to grow their savings over the longer-term.
With investing your capital is at risk and you may get back less than you put in.
1 Assumes account earns UK average easy access cash savings rate of 0.38%
2 Rate correct as of March 2017. Source: Moneyfacts
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The comments and opinions expressed in this article are the author's own and should not be taken as financial advice from Wealthify.