Interest rates and you

Interest rates and you

Interest rates and you

September’s decision by the Monetary Policy Committee was to keep rates at historic lows of 0.25%, but in a statement it confirmed that “slightly stronger than anticipated” UK economic growth could result in a rate rise. In a speech to the International Monetary Fund in September, Bank of England governor Mark Carney suggested that a rate rise might be necessary to bring inflation back to the Bank’s target of 2%. And while he hasn’t made any suggestion of when they might first go up he has made attempts to reassure consumers and businesses, saying that rate rises will be ‘gradual’ and ‘limited’. So what might an interest rate rise mean for you?

Savings
A rise in the Bank of England base rate is likely to result in a boost for consumers as banks pass on the rise to savers. Remember though, that rate rises are likely to be modest and returns on deposit accounts may still struggle to beat inflation (which ran at 2.9% in August). So unless you need instant access to your funds, it might be worth considering an alternative such as Stocks and Shares ISA over cash deposits.

Annuity rates
A rise in interest rates usually corresponds with an increase in gilt yields (gilts are fixed rate and fixed term government bonds). Gilts yields are closely linked to annuity rates and when gilt yields rise, so too do annuity rates, this is because insurers often use investments in gilts to secure regular income for annuity customers.

Cash Equivalent Transfer Values (CETVs)
If you’re a deferred member of a Defined Benefit (DB) or Final Salary pension scheme, and you’re interested in freedom and choice you may be considering transferring your benefits to a Defined Contribution pension. While gilt yields have been low, it’s been costing employers more to secure their scheme benefits (ensuring they’ll have enough funds to meet the pension payments of all the members). Increasing interest rates, translating into increasing gilt yields could make future commitments more affordable and (all other things being equal) we could see CETVs (the sum offered to those wanting to take benefits out of a DB scheme to secure similar benefits in DC) begin to reduce.

Pension portfolio
Rising interest rates and subsequently gilt yields usually means falling gilt prices. This could mean a slight fall in the value of any gilt holdings in your portfolio. If you receive advice from Aspira on your investments or pension, you’re normally entitled to an annual review which would include rebalancing so that the performance of different asset classes (including gilts) is taken into account and your overall risk-based asset allocation is reviewed and corrected each year.

Mortgages
This is perhaps the most obvious place where  a change in interest rates can have an impact. This is especially true for people with interest only mortgages. Back in 2015 when there were rumours of an imminent rate rise (which never happened!) the Telegraph wrote about the potential impact on mortgage holders. In research they found that the average UK homeowner with a loan-to-value of 90% could expect to see monthly repayments increase by £189 per month based on a rise of 0.5%. Of course if you’ve fixed your interest rate you won’t see any difference in repayments until your deal comes to an end, but it’s important to factor the effect of any rate rise into your budget planning.

And finally…
Changes in interest rates will, as the Bank of England has pointed out, happen slowly so shouldn’t have any immediate or dramatic impact on your finances. If you’re worried or have questions about interest rates, or the markets in general and how they might impact your circumstances please do get in touch via our website or speak to your Aspira adviser.

Sources:
Mark Carney: Rate hikes will be ‘gradual’ and ‘limited’, Tom Eckett, Professional Adviser magazine, 19 September 2017

What will happen to monthly outgoings if interest rates rise by 0.5 percentage points a year, Anna White, Telegraph, 07 August 2015

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