What rising interest rates mean for your money

But if rising interest rates are bad news for borrowers, they should be good news for savers – if banks raise savings rewards in response.

The latest data from the Bank of England shows the “effective interest rate” on new mortgages jumped 0.29 percentage points to 2.84% in September as markets reacted to the mini- budget, the biggest monthly increase since December 2021, when the Bank Rate began to rise.

Depending on the deal, a discount rate of 3% could cost owners potentially hundreds of extra pounds every month.

Fixed rate mortgages

While those who already have a fixed-rate mortgage will not be affected by a hike in the bank rate, the 1.8 million people who will have to remortgage next year will likely see their payments increase.

The good news is that many brokers think we are unlikely to see the same huge jump in fixed rate trading that we saw after the mini-budget.

David Hollingworth, of broker L&C Mortgages, said there should be “very little change” in fixed rate mortgage transactions if the discount rate rises, as the rate has risen so consistently that markets are pricing in a further increase. “The volatility resulting from the mini-budget should therefore not be the consequence of another hike in base rates this week, because the markets have indeed already priced in an increase,” Mr Hollingworth said.

However, Aaron Strutt of broker Trinity Financial warned that even if the markets had expected another rise in the Bank Rate, they might not be prepared for such a big hike. “Swap rates have come down, but it’s hard to predict exactly how the market will react to a rise as big as 0.75,” he said.

Even though fixed-rate mortgages aren’t going up overnight, they’re still very expensive right now, with the average rate for a two-year fixed-rate deal currently at 6.48%, according to the data provider. Moneyfacts financials, against 5.43. pc at the beginning of October.

Standard variable rates and tracker mortgages

Any increase in the discount rate has an impact on those who benefit from a variable rate agreement, as these change according to the discount rate.

According to UK Finance, the banking trade body, there are 715,000 homeowners with follow-on mortgages and 895,000 with a standard variable rate.

The average rate on a tracker is currently 3.69 pc, according to Moneyfacts.

Tracker mortgages are linked to the Bank Rate, so if a loan with the average rate increased by 0.75 percentage points, it would cost the owner an additional £130 per month, assuming they had a loan of £300,000 to be repaid over 30 years.

The impact of a rise in the discount rate on a standard variable rate (SVR) is more difficult to predict because these change “according to the decision of the lender, which may take some time to materialize” , said Mr. Hollingworth.

The average rate for an SVR was 5.63pc for October, according to Moneyfacts, although some lenders such as the Stafford Railway Building Society are offering SVRs at rates of 4.15pc. Lenders could decide to raise SVR rates in line with the discount rate or by a lower or higher amount, Strutt said.

Mr Hollingworth said: “Given the current uncertain outlook, many are still likely to favor the safety of a fixed rate, although some question whether a variable might be an option if rates don’t climb as high as many planned it.”

Savings

Savers have been the big winners from this year’s relentless rate hikes.

A further £8.1bn was deposited into savings accounts in September – the highest amount saved since June 2021 – as rates soared for the first time in more than a year decade. An increase in the rise in the Bank Rate means that savers can expect rates to continue their upward trajectory.

However, savers should not count on a sudden jump in rates at the end of the week. Sarah Coles, of investment firm Hargreaves Lansdown, said: “For savers, any rate hike is unlikely to produce an overnight big bang where rates jump significantly.”

She said smaller banks and online banks would “continue to push rates up a fraction at a time.”

However, she said the big banks were unlikely to pass on a rise in the bank rate, meaning savers should be careful not to leave their money in easily accessible accounts with these lenders. .

Stephen V. Lee