Interest rates have skyrocketed again, inflation is expected to hit a 40-year high and the economy looks poised for a recession.
There was much to learn from the Bank of England’s bleak forecasts today.
But what exactly does this mean for you and your finances?
The preferred measure of inflation is the consumer price index. It’s a “basket” with a whole range of products, services, and other expenses.
A year ago, the CPI was just 0.7%. It was up to 7% this March, is expected to have hit 9% last month and the Bank of England expects it to hit 10.25% in October.
Your own rate of inflation depends on what you buy more or less of and your income.
For example, drivers will have been pounded by skyrocketing fuel prices.
But to put today’s inflation in perspective, it rose to over 25% in the 1970s.
While inflation is likely to rise further, the Bank of England forecasts that it will fall back to around 2% in two years’ time.
Whether it works is another matter.
Most personal loans are based on fixed interest rates. So if you have taken out unsecured loans, you should continue to pay them back as agreed.
Some credit card tariffs are variable, but usually not explicitly linked to the base tariff, so they do not increase automatically.
If you have a fixed-rate credit card, it’s worth checking the remaining term.
When it ends, you may find yourself in a floating rate, so make a note of it.
Creditspring CEO Neil Kadagathur said: “We risk creating a generation of people for whom rising debt is simply a fact or a life.
“Of 18-34 year olds, a third will need to borrow to survive the next few months – this number will skyrocket in the coming months unless more effective support is offered to the most vulnerable households.”
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First, the majority of households do not have a mortgage, either because they rent, have paid off their loan, or for other reasons.
There are around 11 million outstanding mortgages. But even with these, most borrowers have fixed-rate deals, protecting them from the recent rate hikes — for now.
However, around two million homeowners have Standard Variable (SVRs) and tracker mortgages will almost certainly be affected.
If you have an SVR, the recent surge could add an additional £347.50 to annual mortgage payments, based on a 4.78% interest rate and a £200,000 25-year mortgage.
This, combined with the last three increases, means homeowners will now be paying around £1,313 more a year.
However, borrowers with fixed-rate mortgages will be hit when their cheap rate ends and they have to find another, potentially leading to bill shock.
New mortgage rates are rising but are still historically low.
The difference between the average two-year fixed-rate mortgage rate and the SVR is 1.75% – a difference of around £4,611 over two years, again based on a £200,000 25-year mortgage at 4.78%. A mortgage broker can help you find the deal that best suits your circumstances, taking into account actual costs.
Rachel Springall, finance expert at Moneyfacts.de, said: “Borrowers sitting on an adjustable rate may want to take out a competitive fixed-rate mortgage to protect themselves from rising interest rates, perhaps sooner rather than later. A longer fixation may be a logical choice for peace of mind.”
First-time buyers may also be affected. Vadim Toader, at-equity lender Proportunity, said: “We’ve already seen mortgage lenders scrap cheaper rates in anticipation of the rise, even as house prices have risen by the most in 17 years.
“Novice buyers need to be prepared that interest rates are likely to rise.”
Banks have been painfully slow to pass on the last three rate hikes to savers. Even if they do this overnight, it will be far from inflation.
That means if you’ve got savings, you’ve got to stash them somewhere, so it’s worth keeping an eye on the top buys over the coming weeks.
Top accounts with easy access are currently paying up to 1.5%.
Chase, a bank owned by JP Morgan, pays 1.5% up to £250,000, while Gatehouse Bank pays 1.3% up to £250,000, but the minimum amount you need to deposit is £1,000.
Some savers may choose to invest instead, or use their money to pay off a debt or loan, or make an overpayment on their mortgage when interest rates on it have risen.
Rachel Springall, finance expert at Moneyfacts.deSaid: “Loyal savers who have an easy access account with one of the biggest high street brands see little benefit from rate hikes as many of these brands have passed on just 0.09% since December 2021 and none have passed all three rate hikes , which correspond to 0.65%.
“The average easy access rate has increased by 0.20% since early November 2021, so there is still room for improvement across the sector, but when prices rise it is prudent to compare and switch offers.”
Should savers see the 0.25% passed on, it would mean they would get £50 more interest per year, based on an investment of £20,000.
There’s no way to sugarcoat what’s about to happen: the already sky-high energy bills are about to skyrocket.
When regulator Ofgem raised its price cap last October, the average annual bill rose to £1,277.
Then, last month, it raised inflation by an inflation-wrecking 54% to £1,971 to allow suppliers to reclaim a jump in wholesale costs.
With little sign of these costs falling much, the Bank of England expects the price cap to rise another 40% in October, pushing the average to £2,800.
That means the average energy bill will have increased by a whopping £1,500 within a year.
And those averages hide big variables. The Government has offered a £200 loan but as financial expert Martin Lewis said: ‘The country needs more help’.
In Pictures Ltd./Corbis/Getty Images)
For those on a state pension, projections of 10% inflation mean that the cost of living will far outweigh any increase they’ve just received.
For people with private pension plans, a rise in interest rates due to falling bond prices could have a negative impact.
On the other hand, increasing interest rates can benefit your retirement pot by increasing its value.
And if you’re about to retire, the rise can help raise pension rates by pushing up the gilt yields used to determine your pension.
Helen Morrissey, Senior Pensions and Retirement Analyst at Hargreaves Lansdown, said: “After suffering in the doldrums for some time, pension incomes have risen significantly, helped in part by recent rate hikes and we should see this upward momentum continue .”
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Where to get help
National Debt Limit:nationaldebtline.org and 0808 808 4000 (Mon-Fri, 9 a.m. – 8 p.m., Sat, 9:30 a.m. – 1 p.m.)
Step Change Debt Charity:stepchange.org and 0800 138 1111 (Mon-Fri, 8 a.m.-8 p.m., Sat, 8 a.m.-4 p.m.)
Citizen Advice:citizensadvice.org.uk and 0800 144 8848 (England), 0800 702 2020 (Wales)
https://www.mirror.co.uk/money/you-need-know-1-base-26886933 Everything you need to know about the 1% base rate and how it's affecting your pocket