What is the financial impact of a base rate rise?

“The base rate” and “a rise in the base rate” is a phrase often bandied about by the media when discussing financial matters – but what is the base rate, what does it do and how does it’s movement affect your personal finances? Let’s find out…

What is the base rate?

The base rate is the level of interest that the Bank of England charges when they lend money out to commercial banks. It is reviewed eight times a year, at which point in can increase, decrease or stay the same. At the time of writing, the base rate is set at 0.75% and has been at this level for the past 18 months.

Great – but how does that affect me?

The base rate essentially ends up dictating the offers that banks pass on to consumers in the guise of mortgage products, loans, other credit, and savings. A higher base rate is generally good news for savers, who will be able to earn more interest – but bad news for borrowers who may find that mortgages, loans and other credit is more expensive. Of course, the converse would be true should the base rate go down rather than up.

What would happen to my finances if the base rate went up tomorrow?

Check out our summaries below to get an idea of how your personal finances might change with a base rate rise (although please be aware that there is no indication that any rate change is impending – this is purely hypothetically right now).

Personal Loans

According to an expert we spoke to from short term loan broker Growing Power:

 If you already have a loan, then your rate will have been decided when you took out the loan and this will not change. So there should be absolutely no impact to you and your ability to afford the repayments on this.

If however, you are yet to take out your loan, then it may mean that the interest rate increase means you have to rethink the amount you want to borrow, or the term-length you want to borrow over, in order to meet the repayment amounts more comfortable each month.

Savings

A base rate rise is good news for savers. Chances are you will see new headline rates advertised and this may be a great time to sign up for a new savings account.

For existing savings, it entirely depends on what type of savings account you have. If you have signed up for a fixed rate bond, then chances are you are not going to feel the benefit of the base rate rise, and indeed, the rate that you locked in previously may now not feels so competitive. Many fixed-rate savings don’t allow you to withdraw your money until the term is complete, whereas some will allow you to take out your money but you may need to pay a penalty.

However, if you have a tracker savings account, this follows the Bank of England base rate, so you can expect to see an immediate increase in your interest rate.

Other types of savings account should receive the benefit of the rate increase, although it may not be passed down immediately and is not actually guaranteed to increase at all – although if this is the case and you are not locked into the account, maybe it would be a good time to consider shopping around and move your savings to a better-paying account.

Mortgages

Just as with savings, it really depends on what type of mortgage you have. If you have a tracker mortgage, then a rate increase will be bad news for you, as the interest rate on your mortgage will also go up and you will be paying more in interest immediately.

However, if you have a fixed-rate mortgage then your repayments will be unaffected for the term that was specified when you signed up for the mortgage. Once this term has expired, assuming the base rate hasn’t come down again, then you will probably find that all of the mortgage products available on the market are now at a higher rate than your previous fixed-rate – and consequently, you may find your monthly repayment amount will need to increase – so you will still feel the impact, it may just be a delayed effect.

So there we have it. Hopefully, this has article has given you a good insight into how any change in the base rate may affect you on a personal level. But if you have any further questions, feel free to leave them in the comments below.

How you could reduce your debt using credit cards

OK – on the face of it, this article sounds pretty counter-intuitive. You may think that, surely, credit cards are just a sure-fire way for someone to accrue more debt, not reduce it?

Well, possibly – but it all depends on the type of credit card that is being used and how well it is being utilised. There are some credit cards that – if used correctly (this really being the operative word) – could help the carrier reduce their level debt.

The primary two card types we are referring to here are cashback and balance transfer cards. Below we will explain each of these and how they could be exploited to reduce your debt.

Cashback Cards

A cashback credit card pretty much does what it says on the tin. You earn money back when you use the card to make purchases. Some cards provide cashback on all purchases, while others only provide cashback on purchases made with a specific set of retailers or specific types of products – check the terms and details of each card before applying so you understand what the rules are.

This cashback can quickly add up and can be used to pay off existing debts.

I know what you’re thinking, “this sounds great, but surely there is a catch?”. Well, you’d be right. Cashback cards have a couple of drawbacks. Firstly, they often come with a monthly or annual fee – so you will need to do a quick calculation to see if the cashback you are likely to receive will significantly exceed the fee.

As a quick example of this, one cashback card from Santander I checked at the time of writing has a £3 monthly fee and offers 0.5% cashback.

So if you were to spend £1,000 per month on the card, at the end of the year you would have paid £36 in fees but earned ~£60 in cashback, so in this scenario it would be worth it.

The other drawback is that cashback cards often have relatively high-interest rates which can negate any cash you have earned. So ensure that you are able to pay off the balance in full and on time every month to ensure you are never hit with any interest or charges – as these would quickly wipe off any money you earned through cashback and render the whole venture redundant.

Balance Transfer Cards

Balance transfer cards allow you to move an existing debt over and pay 0% interest on it for a time. This is a really simple way to instantly reduce the amount of interest you are paying, and you can use the money you are saving on those interest charges to pay off other debts or reduce your overall debt balance(s) more quickly.

Some of these cards charge a fee to transfer a balance, either a percentage of the amount transferred or a flat fee. Check the details of any card before signing up.

As an example of how this would work, let’s assume you have a credit card debt of £10,000 on a card that charges 19.3% APR and you are repaying £500 per month towards that debt, whilst not adding to the debt through additional spending.

In this scenario, it would take you two years to repay the debt and during that time it would have cost you £1,948 in interest.

Now, instead, imagine you moved that debt to a credit card that offers 0% on balance transfers for 24 months and charges a one-off fee of 1.4%. In this case, you would pay the debt off four months sooner and save over £1,800 in interest charges. This is a significant amount of money that could be used to pay off other debts.

You can check exactly how much you would save based on your personal circumstances using an online calculator.

Caution Advised

As mentioned at the head of this article, these methods only work if they are used properly. Credit card companies aren’t fools and offer all of these incentives as a way to get new customers in to make money off them in interest and charges somewhere down the line.

If you don’t trust yourself to manage these methods properly then you should think very carefully before applying for one of these credit cards as otherwise, you may risk just increasing your level of debt further. You should also consider your own personal circumstances and evaluate whether either of these credit card types are suitable for you.