How are interest rates and inflation affecting you?


Interest rates rise for the fourth time in six months, meaning higher monthly payments for around two million homeowners.

The Bank of England has raised interest rates from 0.75% to 1%, a level not seen since 2009.

It’s hoped the move will help stem an alarming rise in inflation, but it means high street lenders will raise the rates they charge on adjustable-rate mortgages and loans.

Borrowers are therefore facing higher costs at a time when energy bills and food prices are soaring. Meanwhile, savers can expect slightly better returns on their money.

So how will the bank’s rate hike affect people’s mortgages, savings, and investments?

(PA graphic)

(PA graphic)

How will homeowners be affected?

Of the nearly nine million outstanding home mortgages in the UK, less than a quarter will be directly affected by the latest rate hike.

Just under one in ten mortgages are trackers, meaning the rate borrowers pay is directly linked to the Bank of England’s base rate. Around 850,000 homeowners will immediately get a 0.25 percent rate hike.

Another 1.1 million people have a standard variable rate (SVR) rate, often because that’s the default contract their lender imposed on them when a fixed-rate contract expires.

These interest rates are set by individual lenders and are usually closely related to the Bank of England base rate.

Three-quarters of outstanding mortgages are fixed rate, meaning these homeowners will not feel the immediate impact of a rate hike, according to figures from trade association UK Finance.

However, if interest rates remain higher, these borrowers will find that they have to pay more every month when they renew their mortgage contract.

– What will be the impact on cash mortgages?

The average borrower on a tracker mortgage pays around £25 extra in interest a month, according to UK Finance. This is based on an outstanding balance of £121,034.

Someone with a typical SVR balance of £76,499 would pay about £16 more a month assuming the lender passes on the 0.25 percentage point increase in the base rate in full.

What can mortgage holders do about the increases?

Borrowers with variable interest rates could protect themselves from rising interest rates by taking out a fixed-rate contract. According to, the average two-year fixed rate has risen to over 3 percent in recent months.

The Bank of England said on Thursday it may raise interest rates further this year and markets are predicting more hikes are on the way.

Does the rate hike mean better news for money savers?

Rachel Springall of said the average interest rate on easy access savings accounts has risen just 0.20 percentage points since November, from 0.19% to 0.39%.

She added: “There is still room for improvement across the industry, but when prices go up it’s wise to compare and switch offers.

“As we have already seen, it may be a few months before customers see any benefit from an increase in the base rate, but there is no guarantee that savings providers will raise their interest rates.”

Ms Springall said a 0.25 percentage point increase passed on in full would mean she would receive £50 more a year in interest, based on a £20,000 investment.

Pensioners’ incomes could also increase. In April 2021, a £100,000 pension pot would give you a one-off pension income of £4,882 a year. Now that number has increased to almost £5,600.

Is there anything else savers should consider?

Paul Titterton, Head of Digital at Abrdn, suggests that some people might want to consider investing in stocks and equities.

Mr Titterton said: “Anyone who is able to put money aside for their future should consider where they are saving and how they are managing risk. Cash deposits, while safe, are hampered by low interest rates and rising inflation. Stocks and shares and investments Is as carry higher risk but could potentially generate higher returns over the long term.”

– What impact could rising interest rates have on investments?

Jason Hollands, Managing Director of Bestinvest, said: “Rising borrowing costs are affecting the way investors value companies and in this regard ‘growth’ companies in sectors such as technology and communications services are particularly vulnerable.

“That’s because investors are evaluating these companies primarily based on projections of future earnings, rather than their earnings today. As rising borrowing costs and inflation create greater uncertainty about the future value of money, investors revise their views on what such companies should be valued at.

“On the other hand, some companies are much more resilient to the current environment. banks can actually benefit from rising interest rates, energy companies are a major component of inflation, and some companies offer hard-to-replicate products and services that customers cannot do without, allowing them to pass on cost increases without sacrificing profit margins.

“The UK market has more than its fair share of companies like this and as such the UK equity market has held up relatively well so far this year. In our environment, solid companies with conservatively funded balance sheets that can pay attractive dividends should be on investors’ radars.

“In recent years, these have often been overlooked as boring by investors, but it’s time to take a different look.” How are interest rates and inflation affecting you?

Bobby Allyn

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