Interest rate changes – and what it means for you

Bank of England governor Mark Carney has made some important changes to the Bank’s policy on how they set interest rates. He believes that this will help to secure economic growth in the UK.

These changes essentially mean that the Bank’s interest rate policy will also include other indicators besides unemployment rates.

How did we get to this point?

Rewind back to the summer, interest rates were firmly linked to the rate of unemployment with speculation on when the threshold of 7% unemployment would be reached, as this would result in a rise from the historic low of 0.5%.

We are now seeing a rate of unemployment creeping up, which is what has spurred this change in policy. Initially it was believed that the 7% benchmark would be reached in 2016, but recently it was noted as January 2015. This seemed a simple indicator, but now this has changed many people could be left confused and unable to plan their long and short-term financial future.

The Bank has reported that the interest rate may need to remain at a low level for some time.

So what does an interest rate rise mean for you?

An increase in the Bank of England’s historically low base rate may have an impact on your savings, mortgages or any other debt such as credit cards so it’s essential you are prepared for any rise.

The hardest hit will be anyone with variable rate mortgage, as this will result in a rise in your monthly payments. It also means that those looking to remortgage or take out a first or second mortgage will be harder hit financially.

The rise looks to come slowly; Mark Carney has indicated that interest rates would rise only gradually to reach 2% by 2017, an increase in mortgage costs in inevitable.

Good news for savers

However, it will prove good news for savers and those paying into a pension scheme, as they will be desperate for better returns.

Savers have been the worst hit in recent years given the historically low base rate. The low rate has meant that lenders have slashed savings returns. With the arrival of Funding for lending, things got even worse.

Finally, A higher base rate may push up charges on credit cards and personal loans, however with a bigger gap between lender’s borrowing costs and the rates charged on these, there is some leeway.
If you want to find out more about how these changes will affect you, contact us today for sound financial advice.

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