In line with our risk management framework, today we published our Q4 2019 performance update.
A guide to how the base rate rise will affect you
As is usually the case, economists are divided following the Bank of England's decision to hike interest rates by 25 basis points to 0.75 per cent on Thursday.However, the 9-0 vote among Monetary Policy Committee (MPC) members to implement this increase is as unanimous as it gets, and the Bank has largely been true to its word, having advocated the need for consistent, gradual rate rises in November.
As such, households and businesses have had ample time to prepare for this eventuality, and while the common turn of phrase within the media is that base rates are now 'the highest they have been in a decade', the reality is that, in historical terms, they remain within the realms of record lows. It is why we wholly support the MPC's verdict and welcome their indications that further (gradual) rises are in the pipeline.
Nevertheless, an increase in Bank rate does have ramifications - both positive and negative - within the economy, and it is important to have a sound understanding of what it will mean for you, and how best to get on top of it.
Savers - a good news story?
In theory, interest paid by banks and building societies on savings accounts should be linked to Bank of England (BoE) rates. As such, savers can expect some favourable shifts within the market over the coming weeks and months. After a miserable decade of derisory returns, it represents some long-overdue relief.
However, it must be borne into mind that banks aren't actually under any obligation to increase returns, despite the rate hike. Of the major high-street institutions, most were quoted on Thursday as saying that they would simply 'review' their rates. In truth, banks are notoriously slow at passing on the benefit of a rate rise to their savers - if the full benefit is even offered at all.
The aftermath of November's base rate increase indicated that major banks appear to be well stocked in terms of deposits, with recent uplift in savings rates arising more from competitive offers by smaller players. So those sitting with money in a long-held account shouldn't expect returns to suddenly ramp up by default (and those with fixed-rate savings unfortunately won't see any uplift at all).
Instead, a proactive approach is strongly advisable. Keep an eye on best buy tables and look to shift your money to find a better rate. At present, you can fetch 1.4 per cent in an easy access account, and up to 2.2 per cent if you lock your money away for two years. Disappointingly, that's still below the present rate of inflation (2.4 per cent), but the overall picture should improve as the base rate increase takes effect.
Bottom line: the rate hike will bring benefits for savers - you'll just need to go out there and find them.
Should homeowners be concerned?
While savers will have allowed themselves a smile, those with mortgages won't be as pleased with Thursday's news. If you have a fixed-rate mortgage, you will remain unaffected for now. However, if Bank rates continue to rise, it is highly likely that you will need to remortgage at a higher interest rate.
For those with tracker and variable-rate mortgages (roughly 3.7 million Brits), borrowing costs are likely to go up almost immediately. In the case of the former, your rate tracks the BoE rate, so you'll be paying 25 basis points more worth of interest once your lender implements this change.
The rate of interest you pay on variable rate mortgages is subject to change at any time, and doesn't track shifts in base rates. Nevertheless, history suggests that lenders pass on such an increase to their customers very quickly (and in full), so you can expect to hear from them soon.
The amount your repayments are likely to go up by on a tracker or variable rate mortgage will vary depending on the terms of your agreement. But for those with a mortgage of £150,000 over 25 years, with an SVR in the region of 4 per cent, you can expect to be paying roughly £20 more each month once this rate rise kicks in.
What about cards and loans?
Most personal loans have fixed rates of interest, so if you're already paying one off, you shouldn't be affected. However, for those currently looking to take out a loan, it may be advisable to act quickly.
Credit cards almost always offer variable APRs, which means you will be at the mercy of your lender following Thursday's base rate increase. In fact, providers such as Barclaycard and Halifax have cards directly linked to Bank rate, so if you're in possession of one of these, you can expect higher rates off the bat.
That said, you do have options - the best of which is to simply pay off your card as quickly as possible. Failing that, you could look to transfer a balance, as many providers offer lengthy 0 per cent introductory periods. Alternatively, you could look to consolidate credit card debt into an affordable loan. Whichever way you decide to go, just make sure you don't get stuck making minimum repayments on high balances, as this will likely become very costly.
How will investments and property be affected?
The decision to hike rates is typically indicative of a strong economy, which in turn should mean favourable conditions for shareholders. That said, most FTSE 100 companies do significant trading overseas, so the initial bounce given to sterling by a base rate increase will conceivably hurt share prices.
Experts have offered up mixed reviews on how they expect investments to be impacted. Some cite the prospect of rising yields on equities and bonds as a natural upshot of higher base rates. Others point to the prospect of it causing further disruption amid Brexit uncertainty, with the additional consequence of clamming up the housing market, as mortgages become more costly and homeowners clamour to fix for longer.
While it isn't a precise indicator, given the vast differences between the two economies, and numerous other unrelated stimuli, UK investors can at least take heart from their counterparts across the pond, with the Dow Jones Industrial Average Index having climbed by over 40 per cent over the past two years - a period during which the Fed has boosted rates on no fewer than six occasions.
So, will this be a force for good?
Nothing in economics is certain, and any number of variables could render the MPC's vote to hike rates a good one, a bad one, or null and void. At Lending Works, our take is that the impact is unlikely to be too profound either way. Nevertheless, we believe it to be an important, valid step in the right direction towards the normalisation of interest rates.
The only guarantee of the economic cycle is that a downturn will strike at some point - even if it is a long way into the future - and it is imperative that a central bank has room to manoeuvre in such an event. Additionally, inflation, currently above the Bank's target of 2 per cent, continues to erode household spending power, and the rate hike provides a much-needed curb on this.
As for the ‘savers vs borrowers’ debate, it is almost certain that gains will be availed to the former, while the latter can minimise any adverse effects. There are many ways and means to make the best of it. The truth is that, in this particular context, the riskiest response of all is inertia.
Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.
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