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What happens when interest rates rise?

Written by Ipswich Building Society

1 Aug 2018

Tags

Bank of England, Interest rates

3 min read

The Bank of England has voted to increase interest rates for the first time this year to their highest level since 2009. Read on to find out a little more about interest rates and how changes might affect your finances.

What are interest rates?
Known more formally as the Bank of England Base Rate, interest rates are set by the Bank of England and determine how much interest is paid on reserves held by financial institutions at the Bank of England. This then affects how much interest is charged or paid on borrowing and investments.

Who sets the Base Rate?
Interest rates are set by the Monetary Policy Committee (MPC) of the Bank of England, headed by the Governor (currently Mark Carney). The committee meets eight times per year to decide how to set current interest rates.

Why does the rate change?
The MPC changes the Base Rate depending on the needs of the economy. For example, when inflation is significantly above the 2% target set by the government, interest rates may be increased. This may help to control inflation as people reserve more of their money to service their debts or take advantage of higher savings interest rates.

How do changes to the Base Rate affect me?
Whether you are affected by interest rate rises depends on the type of borrowing and/or investments you hold.

How will the changes affect my mortgage repayments?
If you are on a fixed rate, you will be unaffected by changes to the Base Rate while you are in the fixed rate period. Tracker rate mortgages follow the Base Rate, so an increase would cause your repayments to increase in line with the change. Variable rate mortgages generally follow the Standard Variable Rate (SVR) of your lender and so are not directly affected by changes to the Base Rate, but are usually influenced by it.

How will the changes affect my investments?
Banks and building societies set their own levels of interest payments but may change these in line with changes to the Base Rate. Again, however, these can also change at any time and may not be directly linked to the Base Rate. Investments that pay a fixed rate of interest won’t be affected by changes to the Base Rate. If you have a tracker rate investment then the rate paid on this will increase in line with the increase in the Base Rate.

What can I do if I have concerns about my mortgage repayments?
If you are worried about not being able to meet increased mortgage repayments, you should first speak to your lender to see if there is anything they can do to help. If you are worried about debt you can speak to Citizen’s Advice or StepChange, a debt management charity who may be able to give you advice.

This article was published under our previous name of Ipswich Building Society. We changed our name in 2021 – find out more.

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