Interest rate rise: the winners and losers

THE Bank of England has raised its interest rate to 1.75% in its latest meeting, its largest hike rate since 1995 and the sixth interest rate rise in a row.

The effects of the change will be felt in different ways, depending on whether you are a saver or a spender and your stage of life.

Here are the winners and losers from the latest rise in rates this week.

Borrowers facing higher costs - with the young hardest hit

Anyone borrowing money - be it on loans, credit card or mortgages - stands to be affected by a rise in interest rates. They may not feel it straight away but they will find their debt gets more expensive to service in the future if they need to reborrow.

Young people, in particular, may bear the brunt of the latest interest rate rise because they are more likely to be taking on long-term debt. If you have children or grandchildren moving out to start university they may be in the process of applying for student loans - not to mention overdrafts and credit cards to help fund university life.

The recent increase in interest rates means many of these things will get more expensive.

In April, the average annual interest rate was 20.07% on bank overdrafts and 18.08% on credit cards and lenders could increase fees again following the Bank of England’s latest interest rate rise¹ - so, it really does pay to shop around for the best rate if you are relying on this type of credit.

Savers in line for a (small) boost

On a more positive note, cash savers may receive a boost in their interest from the rate rise, albeit a small one.

Rates for savings accounts have been rising but returns still lag the rising cost of living by a huge margin. The best return you can currently get on easy-access cash accounts is 1.8%, versus an inflation rate of 9.4%.

‘Sandwich generation’ feel the squeeze

The sandwich generation are typically in their forties, with responsibilities for bringing up their own children as well as taking care of their ageing parents².

They are also the most likely to be shouldering large mortgage debt. If you have a mortgage, it’s good to factor in higher costs that stem from the interest rate hike, particularly if you have a tracker or variable rate mortgage. Again, it’s worth shopping around for the best deal or exploring whether a fixed rate works better for you.

According to TotallyMoney and Moneycomms, the average UK property costs £270,708, with a 75% loan-to-value ratio, a 0.5% interest rise will mean mortgage repayments will cost £196 more per month, compared to November last year³.

With 850,000 properties on tracker mortgages and 1.1 million on standard variable rates (SRV) - both of which reflect changes in rates immediately - one in four mortgage customers will have no protection against the interest rate hike.

Pensioners face a squeeze - but those waiting to retire could nab higher annuity income

Rising interest rates have multiple implications for retirement finances.

Rate rises tend to be triggered by rising inflation which hurts those living on a fixed income, such as retirees, because the real value of their income is eroded.

If your pension is currently worth £100,000 and you plan to retire in 10 years’ time, inflation averaging 2% per year would reduce the buying power of your money when you retire to little more than £82,000 in today’s money. Inflation running at 4% would reduce it to £67,500.

UK inflation hit a whopping 9.4% in June, according to data from the Office for National Statistics (ONS)⁴.

For those approaching retirement in the next five years, it’s important to check how much you will need to retire. My colleague Emma Lou Montgomery’s piece on whether you need a £1m pension pot tells you how much, touching on the lifetime allowance and the rising cost of living.

One potential silver lining from a rate rise concerns those retiring soon and planning on using an annuity - the financial product which takes your savings in exchange for providing a guaranteed income for life.

The incomes that annuities pay is worked out using interest rates, and the level of income rises when rates rise.

Stocks and shares investors face yet more turbulence

Rate rises have tended to be bad for stock markets because they suggest that momentum needs to be taken out of economies. Higher borrowing costs takes demand out of the economy and makes it more expensive for companies to invest - all things that are potentially bad for companies.

The rate rises we’ve seen this year have been particularly painful because they have hurt the largest companies - and those held by the largest number of investors - the most. That’s because much of their value is based on earnings projected for the future, which are worth less if inflation and interest rates are higher.

It may now be possible that markets have already priced in the current cycle of rate rises, so won’t be blown off by the latest rise. Either way, stock market investors should expect the current turbulence to continue for a while yet.

One way to make the investing journey easier in volatile markets is to automate your contributions, meaning you can more easily ignore the short-term noise that might otherwise blow you off course.

You can begin saving in a stocks and shares ISA with as little as £25 a month. If you’d like to take advantage of our cashback offer, set up a monthly regular savings plan for £200, or invest a lump sum of £2,500 or more, in a Fidelity Investment Account, ISA or SIPP online by 12 September 2022 to receive £25 cashback.

The headlines on the recent interest rate hike can seem daunting whether you’re a retiree, student or part of the sandwich generation. Many will find it tougher to achieve their financial goals - even if there are a few silver linings here and there.

If you’re struggling to decide where to invest, you can check out our Navigator tool or if you are unsure about the suitability of an investment you may want to speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

Source:

¹ BBC News 04.08.22
² RockWealth 06.01.22
³ TotallyMoney 02.01.22
⁴ inews 20.07.22

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