Andy Webb warns banks' interest rate rises may not be beneficial
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In a torrent of announcements today, people found out they would have a significant annual fall in their standard of living. OFGEM has hiked the energy cap by 54 percent, spiking average bills close to £2,000 a year, while chancellor Rishi Sunak prepares to clamp down on National Insurance payments with a 1.5 point increase. The Bank of England has released a raft of painful predictions for the year ahead, one of them doubling the UK’s interest rate.
How will the Bank of England interest rate impact average Britons?
The Bank of England is responsible for setting the base rate UK-based lenders can charge borrowers.
The decision on how high this is falls to the Monetary Policy Committee (MPC), and in 2022 it has decided to hike it by 0.25 percent.
The new rate of 0.5 percent is a response to rising inflation, now at 5.4 percent – its highest in 30 years.
By spring, the bank estimated it would increase to seven percent.
With interest rates increasing, inflation should return to the two percent target within the next two years.
BoE staff did not rule out further boosts to the rate, stating they may “need to raise interest rates somewhat further”.
Both the current and any future boosts to the UK’s interest rate will leave those taking loans see their finances tighten.
As loan schemes, mortgages are in the immediate line of fire of rising interest rates.
Lenders will want to pass on any rising costs on their end to consumers, likely boosting mortgage payments.
Martijn van der Heijden, CFO of mortgage broker and lender Habito, said the rise could be the “first of several”, leaving people with a “shock” for the first time since 2004.
He said: “Anyone who’s bought a home in the last 13 years has only ever had a mortgage during a time when base rates were one percent or below.
“That’s a long time to get comfortable in paying historic low interest rates, to then have those rates jump – potentially to their highest level in over a decade – in just 10 months’ time.”
Mr van der Heijden disclosed ways homeowners could blunt the blow from the additional inflation hike.
He said: “For homeowners with deals expiring in the next six months, it’s the ideal time to look at whether fixing their mortgage costs and protecting themselves against further household bill volatility, is the right course of action.
“Some lenders won’t let you switch before three months, but there are lenders out there which allow you to lock in a deal six months early.
“For anyone with deals expiring mid-2022 and beyond, there could be an expensive watch out; Early Repayment Charges (ERCs).
“These are set by your lender and can be thousands of pounds.
“However, homeowners could now start to weigh-up whether paying an exit fee, to remortgage early and lock in a lower rate now, is financially worth it.
“If you’re unsure, a mortgage broker will be able to help show you what a new deal would look like.”
Cost of living
Inflation has left the UK weighed down by a cost of living crisis, with food and other vital products more expensive to secure.
The entire point of raising the base interest rate is to rein this in, but energy and gas prices are fuelling the recent surge.
A base rate increase likely won’t make a significant difference to this.
Fuel and electricity prices in the UK are a product of global influence and the weather, such as demand in Europe, a colder winter, and conditions required for wind and solar power.
With borrowing prices also likely to rise, people will find it more expensive to live in 2022.
One of the few positives from the move is a stronger pound, helping the country compete internationally.
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