Rate rise could see 3% savings interest

Commenting on the Bank of England’s decision to increase interest rates by 0.75%, Sarah Pennells, Consumer Finance Specialist at Royal London says:

"Today’s interest rate rise was widely predicted, and while that doesn’t lessen its impact for borrowers, there should be some good news for savers. Interest rates on savings have been rising since the Bank of England started increasing the base rate. Whereas the best buy easy access accounts paid 0.7% interest last year, they now pay around 2.5% and today’s rise would see best buy accounts paying more than 3%, if the increase is passed on in full.

"Whilst this is positive news for savers, borrowers will be concerned by the increase in interest rates. Mortgage borrowers in particular have had a worrying few weeks and today’s rise will mean higher payments for the 2.2 million people on a variable rate mortgage. A homeowner with a £200,000 25-year repayment tracker mortgage could see their monthly payments rise from approximately £1,083 to £1,169 – paying an extra £86 a month, or more than £1,000 a year.

"For anyone on a fixed rate, today’s rise is likely to have been overshadowed by the response of mortgage lenders to the mini budget in September, when more than 1,600 deals were withdrawn. However, borrowers whose fixed rate deal is due to run out will be bracing themselves for higher mortgage payments."

Six steps to cope with an interest rate rise:

1. Check how much interest your savings are earning. Some easy access accounts pay 0.1% interest, or even less so you could be in for a nasty surprise.
2. Check comparison sites and best buy tables for savings products but wait a couple of weeks before you choose, so banks and building societies can announce any savings rate rises.
3. Use comparison or mortgage broker websites to see how your variable mortgage rate compares to the best buys.
4. Not all mortgage lenders take the same approach when assessing whether they want to lend to a particular borrower. A mortgage broker can advise you on the best option for you.
5. Be aware that while the interest rate on personal loans is fixed, rates on credit cards can rise for both new and existing customers.
6. If you’re struggling, talk to your lender or a debt advice charity such as StepChange or National Debtline.