The Bank of England has increased interest rates for the 14th month in a row – meaning they now stand at 5.25 per cent.
Members of the Monetary Policy Committee have been hiking rates in an effort to tackle inflation, which remains well above the Bank’s target of two per cent.
But while high inflation is putting many people’s finances under strain, raising interest rates causes its own pressures for hard-pressed households.
So what does this latest rate hike mean for you and your finances?
Higher mortgage payments
Interest rate rises will be deeply felt by anyone with a mortgage, as anyone on a variable rate mortgage is likely to face higher monthly repayments.
According to estimates from the Bank of England, nearly a million households are set to see mortgage payments go up by at least £500 a month by the end of 2026, while more than two million households will pay between £200 and £499 more each month.
The Bank also believes that the average household coming off a fixed rate deal in the second half of this year will see their monthly repayments go up by £220 if they refinance at current rates.
Needless to say, the impact of these increased payments could be devastating for some, and at least strongly impact on the budget and disposable income of others.
Higher Cost of Borrowing
Interest rate hikes can be costly if you’re borrowing money, perhaps if you have a credit card or have taken out a personal loan.
That makes it more vital than ever for anyone with multiple debts to prioritise their repayments, perhaps working to pay off high interest debts as soon as possible.
Less disposable income
Your mortgage is one of your biggest financial commitments, so if your monthly repayments become more expensive, you’ll have less money to spend elsewhere.
This can impact on countless aspects of your life, from the amount you’re able to spend on essentials such as groceries to how often you’re able to go on holiday or eat out.
Homeowners having less disposable income would also have a wider effect on the economy, as consumer confidence will fall, people would spend less and businesses would see a drop in demand and custom.
According to figures from KPMG, more than half of consumers have cut non-essential spending in the first half of 2023, with many cutting back on luxuries such as eating out, choosing to buy more own brand and value food instead of branded alternatives, or opting to holiday in the UK rather than overseas.
More than a third of those polled cited their mortgage as their main reason to cut back on their spending, as many were worried about their current costs and others were concerned about their monthly repayments going up in the near future.
Not saving as much
On the face of it, higher interest rates are good for savers. But in reality, increased borrowing costs can push short-term concerns to the top of the agenda, and saving to the bottom.
For instance, if a person has debts, they’ll be more likely to prioritise repaying them instead of putting money into their savings.
As a result, many will miss out on the interest they could have got on their savings, and perhaps find themselves with a smaller pot of money further down the line.
Dipping into savings
In a climate of higher interest rates, many businesses will be forced to pass on many of their extra costs to consumers.
That, in short, means basic goods and services can end up costing more and consumers are under greater financial pressure. It’s therefore no surprise that many people are resorting to accessing their savings.
Figures from KPMG show that a quarter of people are currently having to use savings to help them cover essential household costs. This is particularly common among younger adults, with 43 per cent of 18 to 24-year-olds using their savings in this way.
With soaring interest rates having such a profound and wide-ranging effect on people’s finances, it can be easy to get knocked off course as you work towards your long-term financial goals.
That makes it more important than ever to speak to a professional financial adviser, who can take an informed, objective look at your financial situation and offer advice that suits you and your circumstances.
If you have any questions on managing your finances in the current climate without losing sight of your goals, please get in touch and we’ll be happy to speak with you.