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EnergyWhen do interest rates go up?
Filed under: Mortgages
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The nation is divided when it comes to the Bank of England base rate.Those on variable-rate mortgages live in fear of the Bank hiking interest rates from their current low level of 0.5%, while hard-pressed savers are desperate for a rate increase. Here, we investigate what prompts interest rate movements, when the next one is likely to happen and how it could affect you.
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When will interest rates move?
The big question on everyone's lips when it comes to interest rates has got to be, "When will the Bank of England Monetary Policy Committee, which has kept the base rate at the same level since March 2009, make its first move?"
The short answer is that nobody really knows. However, we can look at various indicators to get an idea of when and what the next move might be.
These include interest rate futures on money markets, which are currently forecasting a cut to 0.25% in February. Long term predictions, meanwhile, involve a return to 0.50% in September 2014 and an increase to 0.75% in November 2016.
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Reasons for this include the worsening turmoil in the Eurozone and the disappointing GDP figures showing that Britain's recession was deepening in July.
All this could change, however, particularly if inflation starts going up, because increasing interest rates is one way to control rising inflation.
How will an interest rate move affect borrowers?
An increase in the Bank of England base rate will have an immediate impact on most variable rate mortgages.
A 0.5% increase, for example, would drive up the repayments on a £100,000 mortgage up by around £25 a month, or £300 a year.
Fixed-rate mortgage borrowers coming to the end of their deals would also be hit with higher rates were the base rate to increase as the cost of both banks' standard variable rates (SVRs) and their fixed-rate deals would be likely to rise.
Banks do not have to follow the Bank of England's lead when it comes to all their mortgages, though.
While base rate tracker mortgages have to remain the same number of percentage points above the base rate, variable-rate deals that track the lender's SVR can move up and down independently of the Bank of England.
A number of banks, including Santander, RBS/NatWest and Halifax, increased their SVRs earlier this year despite the base rate remaining at 0.5%.
Credit card interest rates, which can also move independently of the base rate, have also risen since 2009.
How will an interest rate move affect savers?
Low interest rate environments are tough on savers. And things are going from bad to worse.
Easy-access account interest rates have been falling in recent weeks, with providers such as ING Direct, Nationwide Building Society and Santander withdrawing their top accounts and replacing them with less competitive offers.
The best easy-access account on the market at the moment, from ING Direct, is therefore paying just 2.80% on £1 or more. And even that rate includes a huge introductory bonus of 2.26%, meaning that savvy savers will need to shift their cash after the first 12 months.
A rate rise could bring some welcome respite as it might well prompt a raft of new account launches. However, the tiny increases on the board at the moment will do little to ease the long-term pain.
Savers keen to make the most of their money are being urged to take advantage of introductory bonuses (without forgetting to switch accounts when they run out) and to consider fixed-rate deals.
Kevin Mountford , head of banking at comparison website MoneySupermarket, said: "Savers can fight back by ensuring they review their products regularly and switch if necessary."
10 things we hate about our banks
- 1. PPI<p> More than 46,000 of 106,000 the complaints received by the FOS in the second half of last year related to payment protection insurance (PPI). And the organisation is expecting to receive a record 165,000 PPI complaints in 2012/2013.</p> <p> The huge numbers are due to the PPI mis-selling scandal that should now be a thing of the past, but there is no doubt that the insurance, which can add thousands to the cost of a loan, is highly unpopular!</p> <div> </div> <div> (Pictured: Martin Lewis after the PPI payout ruling)</div>
- 2. Mortgages<p> Complaints about mortgages jumped by 38% in the last six months of last year, the FOS figures show, compared to an increase of just 5% in investment-related complaints.</p> <p> Common gripes about mortgages include the exit penalties imposed should you want to sell up or change you mortgage before a fixed or discounted deal comes to an end, and the high arrangement fees charged by many lenders.</p> <div> </div>
- 3. Savings rates<p> While there is nothing in the data released by the FOS about the number of complaints relating to savings accounts, hard-pressed savers have been struggling with low interest rates for several years now.</p> <p> You can get up to 3.10% with Santander's easy-access eSaver account, but many older accounts are paying 1.00% or less and even this market-leading offer includes a 12-month bonus of 2.60% - meaning that the rate will plummet to just 0.50% after the first year.</p>
- 4. Borrowing rates<p> Banks are imposing the highest authorised overdraft interest rates since records began, with today's borrowers paying an average of 19.47%, according to the Bank of England.</p> <p> A typical Briton with an overdraft of £1,000 is therefore forking out around £200 in interest charges alone. Coupled with meagre returns on savings, it's enough to make your blood boil!</p>
- 5. Penalty charges<p style="text-align: left;"> While authorised overdrafts may seem expensive, going into the red without permission will cost you even more due to huge penalty fees.</p> <p style="text-align: left;"> Barclays, for example, charges £8 (up to a maximum of £40 a day) each time that there is not enough money in your account to cover a payment.</p>
- 6. International transfer charges<p> If you need to send money abroad, the likelihood is that your bank will impose transfer charges - and offer you a poor rate of exchange. Someone transferring a five-figure sum could easily lose out by £500 or more as a result.</p> <p> The good news, however, is that you can often get a better deal by using a currency specialist such as Moneycorp.</p>
- 7. Waiting on the phone<p> <span style="text-align: left; ">Automated telephone banking systems, not to mention call centres in far-flung parts of the world, are one of our top gripes - especially as we often encounter them when we are already calling to report a problem.</span></p> <p> In the words of one disgruntled customer: "What is it about telephone banking that turns me into Victor Meldrew? Well, maybe it's the fourteen security questions, maybe it's the range of products that they try to push or maybe it's because I'm forced to listen to jazz funk at full volume while my phone bill soars.</p> <div> </div> <div> "Actually though, I think it's because the people I eventually speak to rarely seem able to solve the issue I'm calling about."</div>
- 8. Being treated like a number<p> The days of a personal relationship with your bank manager are long gone - for the huge majority of us at least.</p> <p> When ethical Triodos Bank investigated recently why around 9 million Britons would not recommend their banks to a friend or relative, it found that almost a third felt they were not treated as individuals. Another 40%, meanwhile, were simply disappointed with the customer service they received.</p> <div> </div>
- 9. Long queues in branches<p> <span style="text-align: left; ">When you're in a rush, the last thing you want to do is wait in a long queue at your local branch.</span></p> <p> Researchers at consumer champion Which? recently found that most people get seen within 12 minutes, but you could have a much longer wait if you go in at a busy time. Frustrating stuff!</p> <div> </div>
- 10. Bankers' bonuses<p> The Triodos Bank research also indicated that the bonus culture that ensured the bank's high-flying employees received large salaries, even when it was making a loss at the taxpayer's expense, was hugely unpopular with consumers.</p> <p> About a quarter of those who would not recommend their current banks said this was the main reason why. And with RBS executives sharing a £785 million bonus pool despite the bank, which is 82% publicly owned, making a loss of £2 billion last year, it's not hard to see why.</p>
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