As you may already know, the Bank of England (BoE) raised the base rate to 1.25% on 16 June 2022.
This rise is the fifth successive jump between December 2021 – at which point the base rate stood at 0.1% – and June 2022. The 1.25% base rate is the highest the UK has seen since 2009.
These rises have been implemented in an attempt to curb the rate of inflation, which according to the Office for National Statistics (ONS), stands at 9.1% as of May 2022. This 40-year high in inflation reflects the UK’s “cost of living crisis”, that has seen the prices of everyday goods and services skyrocket since the start of the year.
Global factors, such as the Russian invasion of Ukraine and the re-opening of society after the peak of the Covid-19 pandemic, have contributed to this high rate of inflation.
So, the BoE has been consistently raising the base rate in response. In fact, according to the Times Money Mentor, the central bank could even raise it to 2% by the end of this year.
If your clients are becoming worried about the rising base rate, it could be constructive for them to learn from a professional about how it may affect them.
Here are three serious ways the BoE’s base rate could affect your clients:
1. The base rate could make your clients’ mortgages more expensive
Most of your clients are likely to be homeowners at different stages of their mortgage repayment journey. Some may be close to paying off their mortgage entirely, while others might have decades to go.
The effect the base rate will have on your clients will entirely depend on the type of mortgage they have.
For example, clients with a fixed-rate mortgage can rest easy, safe in the knowledge their repayments won’t change until the agreed-upon period ends. However, if your clients are coming to the end of their fixed term, they may need to prepare for higher repayments when they remortgage.
Meanwhile, if your client has a tracker-rate mortgage – on which the interest paid is heightened and lowered in line with the BoE’s base rate – they will have already seen an increase in their repayments. According to the Guardian, the UK’s 841,000 tracker-rate borrowers would have seen an average increase of £25.22 a month following the recent 0.25% increase.
Similarly, if your client has a variable-rate mortgage, their lender could have chosen to increase the interest on their repayments in line with the base rate. In general, variable rates are set by individual lenders, so in that case, it may be beneficial for your clients to speak to their lender directly.
In any case, a rising base rate means potentially higher repayments on your clients’ mortgages. If clients are concerned about their mortgages becoming more expensive this year, they can work with us to review their financial circumstances.
2. Higher interest can have a positive impact on cash savings
In more positive news, after a 13-year period of historically low interest rates on cash savings, your clients may experience an uptick this year.
Indeed, according to Moneyfacts, as of 5 July 2022, the best returns on an easy access savings account stood at 1.4%. While this may seem incremental, your clients’ savings may have seen negligible returns in the last decade, so a higher base rate may be welcome news.
It is important to consider, though, that while cash savings may experience more positive returns as a result of the higher base rate, their value in real terms will still be depleted by a 9.1% inflation rate.
For example, if your client placed £30,000 in cash savings with a 1.4% interest rate last year, this sum would now be worth £30,420. Nevertheless, £30,000 of goods and services a year ago would now cost approximately £32,730, while the inflation rate stands at 9.1%.
So, while your clients might be experiencing increased returns on their cash savings, it may still be wise for them to prioritise investing their wealth.
By investing according to their attitude to risk, your clients could experience long-term positive returns that outflank the rate of inflation – an outcome that remains unlikely while inflation stays high.
3. The value of your clients’ investments might be influenced by the base rate
Of course, while investing can yield better returns than cash savings, there are also risks involved – especially in light of a continually increasing base rate.
As was mentioned earlier, one of the key reasons the BoE has raised interest is to slow the rate of consumer spending, and in turn, stop inflation from increasing even further.
However, a drop in consumer spending can have an impact on the markets. If your clients hold shares in companies that become less profitable as a result of reduced spending, their share values could drop, too.
Although past performance is not a reliable indicator of future performance – in essence, it’s never clear what the markets will do – your clients may notice their investments take a hit this year.
Nevertheless, investing is a long-term endeavour, not a short-term money-making project. So, while your clients’ investments could experience volatility this year, it could still be wise for them to remain calm, rather than panic-selling as a result of a value dip.
In this instance, it could be invaluable for your clients to work with an investment expert who knows the market and can provide experienced guidance.
Get in touch
If your clients are becoming increasingly concerned about how these base rate rises might affect their finances, it could be wise for them to seek professional guidance on the matter.
We can help your clients prepare for further interest rate increases if they happen, and answer any questions they may have about adjusting their financial plan in response to the base rate.
For professional advice your clients can trust, email email@example.com or call 0121 313 1370 to find out more today.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Buy-to-let (pure) and commercial mortgages are not regulated by the FCA.
Think carefully before securing other debts against your home.