How would a base rate rise impact your finances?

Many finance experts are predicting that the Bank of England will increase base rate in the coming months to help tackle rising inflation, with some suggesting a rise could come as early as next month.

Base rate has a knock-on impact on the interest rates set on borrowing and savings accounts, with a low rate often helping to encourage consumer borrowing, while a higher rate usually results in consumers seeing better returns on savings accounts.

Right now, base rate stands at 0.1%, its lowest point since the first rate was set in 1694. It was cut by the Bank of England to this rate in March 2020 to help steer the UK economy through the pandemic. Now, however, the Bank of England has suggested that a base rate rise could be imminent as inflation remains above its target of 2%.

If base rate is increased it will likely have a direct impact on savings, mortgages and other types of borrowing. Here we look at how a base rate rise could impact consumers’ finances.

A base rate rise often results in higher saving rates, which after 17 months of record low saving rates may be welcome news to savers. Already, saving rates are slowly starting to rise, with the average rates on easy access savings accounts and fixed rate accounts all increasing month-on-month. This means that savers with an easy access savings account should keep up to date with the latest rates in our easy access savings charts and consider switching accounts as soon as a more competitive rate is launched.

Meanwhile, savers coming to the end of a fixed rate deal have a more difficult decision to make – should they lock into a new fixed rate deal now or hold off in the hope that rates will rise further. “The Bank of England has offered some indication that a rise to the base rate is on the horizon, however no clear timings have been confirmed,” said Derek Sprawling, savings director at Paragon Bank. “It’s understandable that many savers will be uncertain about what to do when making long-term plans for their savings, including whether they should lock into a fixed rate ahead of a base rate increase.

“Our guidance to savers would be to not overlook fixed rates, especially at the moment while the products available in best-buy tables are some of the most competitive since the base rate changed at the start of the pandemic. The savings market is forward looking, which is why rates have been increasing steadily since summer, and the products currently available in the best-buy tables are no longer reflective of the base rate. As a result, an increase won’t necessarily have a direct impact on those products. It’s important for savers to make the most of competitive accounts while they are available as the market is fast moving and might be prone to volatility in the next few months.”

Homeowners on a variable rate, or those planning to buy a property, will likely see mortgage rates start to rise if base rate is increased. The past few months have seen mortgage rates hit record lows, making them more affordable for many homeowners. Although when looking at a mortgage application the lender will factor in if the borrower could still afford the mortgage repayments if rates rise, homeowners should be prepared to pay higher repayments in the coming years and manage their finances accordingly.

It will likely take a few months for mortgage rates to reflect a base rate rise, with variable rates usually increasing first and then fixed rate deals. This means that homeowners on their lender’s standard variable rate or coming to the end of a fixed rate deal should consider locking into a new fixed deal sooner rather than later to benefit from the record low rates currently available.

Mortgage borrowers unsure of which term to fix into, or which is the best mortgage option for them, may want to speak to a mortgage broker who will be able to provide advice and information about the different choices that suit their needs.

Along with mortgages, a rise in base rate may see other types of borrowing become more expensive. Credit card and personal loan APRs could start to rise as lenders reflect the increase in base rate. If APRs do start to rise this could not only make it more expensive for consumers to borrow via credit cards and personal loans, but could also make it harder to get applications approved, especially if lenders become more risk-averse about lending and borrowers start to struggle making repayments. Another impact from a base rate rise could be credit card lenders becoming more risk-averse and reducing interest-free deals and terms on 0% purchase and 0% balance transfer credit cards as a result.