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Base rate rise: what does it mean?

For the first time in 10 years, the Bank of England announced on Thursday 2 November an increase in UK interest rates.
 
Derek Robertson, managing director at Central Investment, one of Scotland's leading firms of Independent Financial Advisers, discusses the reason behind the rise and explains how it will affect individual homeowners.   
 
The official bank rate has been lifted from 0.25% to 0.5%, the first increase since July 2007; and although it may be small it marks the first rise in borrowing costs for a decade.
 
The shift comes as the Bank looks to balance surging inflation brought on by the weakened pound since the referendum, with the slowdown in the economy and stagnant wage growth. This means that if the Bank keeps interest rates low, there is a risk that inflation will get worse; however if it raises the rate then the economy may dwindle further.
 
One certainty is that the rise will produce both winner and losers.
 
The winners - 45 million savers -  are expected to see higher returns from saving accounts and those planning on buying an annuity to finance their retirement will also benefit.
 
The losers -  at least four million households with variable rate mortgages - are expected to see monthly payments rise immediately.
 
So, how will it affect you?
 
Throughout the UK, 9.2 million households have mortgages, with around half on a standard variable rate or tracker rate – these are the people who will be affected most, with monthly payments set to increase.  A homeowner on a tracker mortgage paying 2% interest on a 25-year, £250,000 repayment could see their monthly instalment of £1,100 rise by roughly £30.
 
However, many borrowers are moving away from standard variable rate mortgages to fixed rate mortgages, with around 57% of the total stock of mortgages on a fixed-rate basis. For them the downside will be felt when they re-mortgage their property, as the base rate rise could mean the beginning of the end for cheap mortgages.  
 
A first-time buyer talking out a £100,000 standard variable rate mortgage, on the new interest rates, will pay an extra £12 a month.
 
The base rate rise will have a magnified effect on landlords, as they are more than likely to have an interest-only mortgage, unlike conventional buyers who are required to take out repayment mortgages. This means a 0.25% rise in a £200,000 interest-only buy-to-let deal results in a £40 extra monthly cost, compared with £25 on a repayment mortgage.
 
The future
 
Not all experts agree that a rate rise is the best route to go down. For many it depends on whether you prioritise economic growth or keeping inflation down. If the latter, then the rate rise makes sense.
 
An argument can also be made for the Bank raising rates in case it needs to cut them in the future, perhaps in response to the UK’s exit from the EU with possibly no deal.
 
With industry advisors predicting further increases to be slow and gradual, one thing is for sure –this could just be the beginning. 
 
For the first time in 10 years, the Bank of England announced on Thursday 2 November an increase in UK interest rates.
 
Derek Robertson, managing director at Central Investment, one of Scotland's leading firms of Independent Financial Advisers, discusses the reason behind the rise and explains how it will affect individual homeowners.   
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