How to survive rising interest rates and inflation

Written by Rebecca O'Connor on 1st Nov 2017

The Bank of England today increased interest rates for the first time in more than a decade, from 0.25 per cent to 0.5 per cent.

Big economics just got tougher for all of us.

Borrowers – with mortgages, personal loans or credit cards, may now find their monthly outgoings rising.

Savers will be slightly cheered by a small rise in the rates on their accounts.

It’s an historic rise. The last one, in 2007 – right before the financial crash, was a rise from 5.5 per cent to 5.75 per cent. This was so long ago that some financial commentators have never witnessed one before in their professional lives.

To anyone in their twenties, today’s decision might seem pretty scary.

Here are some of the effects it could have:

  • variable mortgage rates could rise by 0.25 per cent or thereabouts
  • credit card and loan rates could rise by the same amount, roughly
  • rents could rise (yep, that’s because a lot of buy to let landlords have been able to keep rents relatively low because their mortgage costs have been so low – they’ve soaked up a lot of tax changes, but a rate rise might mean an extra £20 or so a month on your rent).

On the flipside:

  • savings rates should rise too (but they might not, banks are rarely as keen to pass on full rate rises to savers as they are to borrowers). Even a 0.25 per cent rise on savings won’t keep up with the more punchy increases in prices.
  • the Pound should strengthen, so your hols won’t be quite as expensive as they were this year – and importers will feel a bit of relief
  • it’s good for older, pension dependent people too

Why has the bank increased interest rates?

It’s the only tool in its box to curb inflation, currently riding at 3 per cent.

Whether the rise in interest rates will have this effect remains to be seen.

Some fear that because inflation is being driven less by demand and more by the weaker Pound post-Brexit vote, the rate rise might not stop prices rising so quickly and we could end up in the worst of all worlds – higher interest rates AND rising prices. Eurgh.

That means those with debts could be in the unfortunate position, for a time, of paying more on both their spending and their credit cards, loans and mortgages.

If you are worried about the rising cost of living, what can you practically actually DO?

Six survival tips:

  • Cut unnecessary spending. So obvious, so difficult to do unless you are really on it all the time. Try using a card that enables you to set spending limits. You could, for example, open a discretionary spending only account with a digital challenger bank, such as Starling, then only add to it the amount you have budgeted to spend for that week.
  • Try to pay off a bit more of your debt each month than you usually do. Even if your loan or card provider doesn’t increase the rates they charge straight away, chances are, they will do, and if your debt is interest bearing, you could end up being charged a few extra pounds a month. A rise in inflation and interest rates is a good incentive to keep your debts as low as possible.
  • Rising interest rates on mortgages won’t affect you if you are on a fixed rate, so you might want to consider one if you are not already on one. However, fixed rates can be more expensive – there’s a premium for certainty – and many borrowers may still be better off on a cheaper variable rate even after a rate rise. On a typical mortgage, a quarter point only amounts to about £15 extra a month.
  • Switch to a cheaper energy tariff – preferably 100% renewably sourced. You could save on energy the extra you are paying on your mortgage. Here’s a wee link to one we like and use ourselves, Bulb.
  • Plan ahead for Christmas. It’s the only way to avoid over-spending when every single retailer in the land is trying to make you spend more, more, more.
  • Consider investing rather than saving – the potential gains are more significant (although losses are too). Chris Atkinson, head of consumer at Zurich, says: “Don’t lose out from just storing all of your hard earned money in cash ‘under the mattress’, or you can be sure inflation will eat away at those savings. Keep a portion in cash, but investing smartly and according to your level of income and outgoings can deliver real returns over the long-term and ensure your money grows. There are still some saving accounts and products on the market, which pay above-inflation returns, so make you look around to get the best deal. “

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