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Kite Loans Blog

Interest rate rise and what it means to you

Posted 27th November, 2017

In a widely anticipated move, for the first time in over a decade The Bank of England have increased the interest rate from 0.25% to 0.5%. A 0.25% increase doesn’t sound like much, but what is the reality and why have they chosen now to implement a raise?

So, why has the Bank of England raised the interest rate now?

The bank has a legal mandate to keep inflation at 2%, but the rate has now hit 3%. As a rule of thumb, when interest rates are low, more people are able to borrow more money. This results in consumers having more money to spend on goods and services which pushes up their price, causing the economy to grow and inflation to increase.

By increasing interest rates the cost of borrowing becomes higher and so less people borrow money. Less money is then spent on goods and services, price increases then slowdown resulting in lower inflation.

Who will be affected?

The rise will particularly affect people with ‘standard variable rate’ or ‘tracker rate’ mortgages, and of 9.2 million households in the UK with a mortgage, around half will have one of these types of mortgage and will now have to pay more each month.

Below is an idea of how much your mortgage will rise by based on a current mortgage rate of 2.53% on a 25 year term.

Change on variable rate mortgages

Outstanding balance

current monthly payment

increase

£50,000

£225

£6

£100,000

£450

£13

£150,000

£675

£19

£200,000

£900

£25

£250,000

£1,125

£32

£300,000

£1,350

£39

In line with the Banks plans, the increase will also make Personal Loans a little more expensive than before the rise, although people with existing loans will not be negatively affected as the interest is set at the time of borrowing.

Are there any benefits?

The rise is a little bit of good news for savers who should expect to benefit from the increases in rates, although not all banks plan to increase the interest paid on savings and of those that do, it’s unlikely they will pass on the full 0.25% increase.

Unfortunately it’s of very little consequence; even if the rate rise is fully passed on, someone with £10,000 worth of savings would only earn an extra £25 a year.

Pensioners will also benefit as they can earn more on their savings, and those planning on buying an annuity to finance their retirement will also benefit as annuity rates track interest rates.

Will there be more rises in the near future?

No doubt the effect of this rise will have to be monitored and reviewed over the coming months to see if the increase has had the desired result. However, further rises in rates are expected to support the value of the pound, and The Bank of England have forecast two more 0.25% rises in the next two years, capping the base rate at 1% by 2020.

Below is an idea of how much extra you can expect to pay per month for each 0.25% interest rise based on a repayment mortgage for £150,000.

How subsequent rises could affect mortgage payments

Average monthly repayment

% rise in mortgage rate

Increase in monthly payments

£698.90

0.25%

£19.15

£718.36

0.5%

£38.61

£738.13

0.75%

£58.38

£758.20

1%

£78.48

£778.56

1.25%

£98.82

£799.23

1.50%

£119.48

£820.18

1.75%

£140.44

£841.43

2%

£161.69