The Impact Of Interest Rates And When They Can Fall In The Uk

March 5, 2024

Interest rates have hiked for the fourth time in a row in the last month, recorded at 5.25%, and cuts are not expected until later in the year. As a consequence of rising inflation, interest rates have moved up and down. There has been a sharp fall in the interest rates in recent months, according to the BBC, which has slackened the soaring cost of living and associated pressures.

The Bank of England sets the base rate, which goes up when there is an increase in the supply of money and demand for certain commodities in the economy. The bank does so to curb the spending power of people affecting the housing market most, followed by credit cards and savings.

The Bank of England currently holds the base rate at 5.25%. When the base rate goes up, interest rates that banks, lenders and other financial institutions charge on their financial products also increase. In other words, it has a knock-on effect, especially on mortgages available at variable interest rates.

The base rate is revised periodically to set the inflation rate at 2%. If inflation does not stop prices continue to go through the roof, interest rates will also proportionately go up, making it even harder for millions of people in the UK to be able to get their foot on the property ladder.

Interest rates are increased amid the soaring cost of living to discourage sending and encourage more savings in the hope that this will whittle down inflation. Once it comes down, the bank might hold or cut rates.

How will interest rates affect you?

The impact of rising interest rates will be seen in mortgages, savings, credit cards and loans.

1.  Mortgages

It is bad news for those looking to get on the property ladder because now mortgage deals are not available at affordable rates. For the first two or three years, you will be on a fixed-interest rate mortgage deal, but then you will be put back on a standard variable or tracker mortgage. A large number of people are on variable deals, and therefore, up and down in interest rates speak to an immediate change in the size of monthly payments.

When you are on fixed-rate deals, you will not see any impact on your interest rates. The size of monthly payments will remain the same throughout the deal, but as it comes to an end, you will certainly face high-interest rates, meaning you will need a rigorous budget.

If you are buying a house or looking to remortgage at this time, you will certainly have to pay a lot more than if you had decided to take out a mortgage a few years ago when interest rates were not skyrocketing.

2.  Credit cards and loans

Credit card deals will be more expensive when the base rate is high. If lenders expect a further rise in them, they will charge even higher interest rates. However, this impact is significantly seen when you are to pay down fixed instalments over a period of time. You can escape interest payments when you are to make the purchase in full on the due date.

The bad impact of a high base rate will also be observed in loans. Whether you take out 15 minute loans paid back in a lump sum or a personal loan paid down in fixed instalments over a period of months, you will have to pay quite high-interest rates.

Although the interest rates will not be changed when you are in the middle of payments with a rise in the base rate, lenders usually set fixed rates quite high. If you are looking to apply for these loans with a bad credit rating, interest rates can be even higher.

If you are on benefits and need a loan today from a direct lender in Liverpool, you will get a small sum that you will be required to pay down in a lump sum. These loans will carry fixed interest rates, so you will not be bothered about an increased interest rate.

3.  Savings

The rise in the base rate by the Bank of England will also affect the interest you will earn on your savings as well. Banks will not be able to offer you high interest on your savings. However, the good news is that you will be able to get the deals on the market if you do some research. Shop around to find a deal. It is likely that you will be able to get a bank that offers you higher interest on your savings.

If you are looking to earn interest on your money, you should consider another alternative, such as investments. You should try to invest in stocks, bonds and mutual funds. You do not have to invest a lot of money in the beginning. Any app allows you to invest as little as £1. Yes, after making a purchase, the spare money can be invested to grow it. You will have the option to choose a portfolio that suits your risk tolerance capacity and investment goals. It is always advisable that you should take advice from an expert.

4. When will interest rates be expected to go down?

Interest rates are all-time high in this period. When the last time a review meeting was held, no decision was made to slash them even though the inflation rate had gone down. Inflation is running at 4%, much lower than the 11.1% recorded in the month of October last year.

The bottom line

Interest rates are still high in the UK, although the inflation rate has sharply gone down. This will continue to affect the interest rates of mortgages, credit cards, loans and savings. It is always advisable to take out a loan only when you are in dire need of money. Fixed-rate deals will also be high because financial institutions are under the pressure of rising base rates.

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