Last month for only a second time in a decade the Bank of England Base Rate was increased. It now stands at 0.75%. Although this isn’t the actual rate that borrowers pay or savers receive, the increase means banks are likely to change their rates accordingly. This is good news for savers but bad news for borrowers, but not in equal measures.
After the last rate rise, whilst almost all banks increased the Standard Variable Rate on their mortgages only half increased the rate they paid on their variable rate savings account. However, several new accounts were launched that paid higher interest rates than the existing range. Similarly, with mortgages fixed rates and discounted rates are available that are usually considerably cheaper than the standard variable rate, although not all banks make all deals available to existing customers. This shows it’s important to be proactive and with many banks loyalty costs.
Even with rising rates it’s important to consider whether a savings account is the best home for your long-term savings. Since the base rate reached 0.5% in March 2009, after adjusting for inflation the average cautious managed fund has grown by 35% and the average aggressive managed fund has returned more than twice that. By contrast someone putting their money into an average one-year savings bond each year has lost 5% after inflation is taken into account. Of course, past performance is not a guide to future performance and investing all your money after a decade of strong returns may not be the best idea. However, it does show the important role “real assets” have in generating a real return.
The other group who this will affect is those with pensions not yet in payment. If the increase in the Base Rate is reflected in long term rates, annuity rates should increase. That’s potentially good news for those who want to purchase a guaranteed income with their fund. On the other side, the cost to schemes of providing final salary pension is likely to fall, which will be reflected in lower transfer values for those who are looking to transfer out of such arrangements.
In summary, there will be winners and losers from rising rates, its important to minimise the losses if you’re on the losing side and maximise the gains if you’re one of the winners.