How Will Interest Rate Rises Affect Pensions Investments and Mortgages

How will interest rate rises affect me? How Will Interest Rate Rises Affect Pensions Investments and Mortgages?

Today, as expected, the Bank of England Monetary Policy Committee (MPC) met and agreed to increase interest rates 0.5% to 0.75%pa.

We could have gone ahead with headlines like “Interest Rates Treble Since 9 Months” or “Highest Interest Rate In 10 Years” but the reality is that they are still historically at all-time lows.

Rock and a Hard Place

We said, on the last rise in November 2017 that 2018 could present possibly another two rate increases in mid and late 2018 or early 2019.  The Bank of England is caught between managing a weak pound and rising inflation whilst not trying to turn off business growth as we head towards the final Brexit negotiations.  We suspect if there is a 'no deal' Brexit, interest rates will fall.

How do rate rises affect you?

Mortgage Borrowers

Over 95% of new mortgages are currently taken on a fixed rate basis, so very little affect.  The reality is that 40% of borrowers do have variable rate mortgages which may mean for every 0.25% interest rate increase your monthly mortgage payment increases as follows (assuming a 25 year repayment mortgage):

• £50,000 owed, meaning an additional monthly payment of £5.50 per month for each 0.25% pa increase = £66 per year increase
• £100,000 owed, meaning an additional monthly payment of £11.00 per month for each 0.25% pa increase = £132 per year increase
• £150,000 owed, meaning an additional monthly payment of £16.50 per month for each 0.25% pa increase = £188 per year increase
• £200,000 owed, meaning an additional monthly payment of £22.00 per month for each 0.25% pa increase = £264 per year increase

Historically rates are still low.  What if interest rates went back up to over 10% pa?  Could your affiord monthly payments?  Make sure you look at your budget and try to overpay your mortgage or look where you can cut back spending to cope with any future rises.

Use our Mortgage Costs Calculator to work out potential repayment amounts if rates rise further.

Savers

Still not much joy here.  0.25% pa extra means only £25 extra interest per year on every £10,000 savings.

Stock Market Investors

Interest rate rises may strengthen the £ which will mean FTSE 100 and FTSE 250 shares may fall in value.  Your ISA, pension and other UK stock market investments have already fallen by -1.24% yesterday and around -1.10% today (at the time of writing - 12 noon).

Pension Annuities

Could be good news for those wanting an annuity.  You may not be aware but if you buy an annuity either directly or from your pension, the rate you receive is linked to long term government borrowing rates, called gilts and gilt yields.  If bank interest rates rise this usually has a knock on effect for gilt yields.  Gilt yields will rise meaning you may buy a bigger pension annuity income.

Gilt/Bond/Fixed Interest Savings Investors

We have been negative on gilts and fixed interest savings for some time.  If gilt yields rise, see above pension annuity explanation, capital values of existing gilts and corporate bonds will fall.  If you already have them, your investments capital value may fall.  In addition, if you currently hold index linked gilts, they may also fall in value given that the Bank of England is trying to reduce inflation with the rate rise i.e.  reducing your 'index linked gilt yield', again meaning capital values fall.

Pension Transfers

Many people are considering transferring their high value defined benefit pensions to private pensions due to high transfer values.  For the same principal above in pension annuities:  When annuity rates are low, the cost to buy a guaranteed 'defined benefit' pension is high hence people getting higher than normal transfer values.  With annuity rates/gilt yields increasing, transfer values may fall.