I try to avoid many conversations about money. Spending money I am great at. Saving, not so great. When it comes to talk of tax, inflation, interest rates and mortgages I often tend to bury my head in the sand and hope to pop back above the parapet when the storm has blown over and the dust has settled. Sometimes however I need to pay attention to what is happening in the world and consider how it will affect my family.
You may have heard today that Interest rates have increased by 0.25% from 0.25% to 0.5%. Not a massive increase you may think, but what impact will the interest rate increase have on you and your family?
The answer is – it depends.
This increase in interest rates is the first increase for almost a decade, and is likely to be followed by more small rises over subsequent years. Whether it affects your disposable income very much depends on whether you have a mortgage, and if so what type, and whether you are in a lucky position to have some savings.
Essentially todays increase means that for many, the price of your monthly mortgage payments may go up, and for savers, the return on your savings may increase.
Mortgages
The home owners most affected by todays interest rate increase are those with flexible or tracker mortgages. Flexible mortgages are just that (flexible) where as tracker mortgages track against the Bank of England interest rate (usually just above it). With the interest rate increasing, these type of home owners are likely to see an immediate increase in their monthly mortgage deductions. According to Nationwide – the average family will see an increase of around £22 a month.
If you have a fixed mortgage, your interest amount is fixed for a set pre determined duration (usually 2, 3 or 4 years) and as such, if you are in the middle of your fixed term period you will not see any change to your monthly mortgage premiums… YET. Don’t go rubbing your hands in glee yet however. When you come to the end of your fixed term you are therefore likely to see an increase, depending on your current rate, and as such, you may want to consider making some overpayments if you can afford to (and if your mortgage terms allow), to try and reduce the total borrowing.
Another thing to be conscious of with fixed mortgages is that often when you reach the end of the fixed period you automatically switch to the bank or building society’s variable rate, which can be significantly higher. Ensure that you keep a note of when your fixed term is due to expire – you can apply to re-mortgage with most providers 3 months before the end of the term to allow for processing time.
(3D Illustration by Quince Media)
Savings
For those of you who are more sensible with money, and maybe saving for that special family holiday or trip away, you may see that the interest you can gain back on these savings will increase. I say may, because unlike mortgages, banks aren’t obliged to pass on the increase to savings immediately (bloody typical right?!). That said, many banks and building societies have already said they will do so, but you are still unlikely to earn more than around 1% in a standard bank ISA. Don’t go booking those flights just yet!!!
So today’s change isn’t life changing, but definitely something to be aware of. With inflation rises, it is likely we may see a few more of these small interest rate increases over the next few years. Whilst a £22 monthly increase may be manageable for some, if £22 becomes £52 or £102 it can suddenly become much harder to manage.
As a family, there are many ways to try and reduce your monthly outgoings – see my frugal maternity leave post and frugal foodie post for some inspiration!
Lucy x
