The Story

"Some removal of monetary stimulus is likely to become necessary" – Mark Carney. Translation: UK interest rates could go up in the near future. 

Who is Mark Carney?

Carney heads up the Bank of England and when there’s big money decisions to be made the country responds “yes gov”. The role of the Bank of England is to maintain economic stability (the same goes for every other country’s central banks). It’s a role you wouldn’t want to see on your job description any time soon. 

So how does it do this?

The powers that be who head up the bank (Read: Mark Carney) can change the central bank’s interest rate, moving them up or down. This matters because high-street banks borrow money from the central bank so a change affects all commercial interest rates. Think mortgages, savings, credit cards, bank loans, … 

What happens if rates go up?  

Well, if you’re a saver you’ll be happy as you’ll get more income on your cash in the bank. But if you have a mortgage, credit card debt or any other loan which outweighs your savings, you’ll end up paying more in interest charges every year.  

What’s the current situ? 

Interest rates today are very low. The central rate is only 0.25%. In our everyday life we’re lucky to get 1.5% on a 1-year fixed rate when it comes to savings accounts while for home-buyer’s mortgages are cheap. A first-time buyer could pay only 3.5% a year on their home loan (and get a discount to pay only 2% in the first two years). 

I have a mortgage. How can I prepare for a change in rate?

Central rates are at record lows and there’s little space for them to move lower. So right now your mortgage is cheap – Lenders are offering historical low rates on 10-year fixed deals. In plain English: Your mortgage is not going to get cheaper than this so you need to be prepared for when rates rise and how this will affect your bank balance. 

Example please!

Say you have 20 years left on a mortgage, your outstanding balance is £300,000 and your mortgage rate is 3.5%. This means today you’re paying around £1,740 a month. If interest rates raise by 1% your repayment may go up to £1,900 -  that’s an extra £160 a month (or £1,900 a year). 

Use this Rate Rise Calculator to forecast your mortgage repayments. 

MOXI Round-Up

Carney’s words are that a rate rise will only come if UK businesses attract investment and consumer spending improves, aka our economy grows. With all this current uncertainty about our future (thanks to Brexit) who knows what will actually happen. However, this is often the case when it comes to investing and that includes buying a home. You should always think long-term and forecast money scenarios at least 5-years ahead, especially if you have a mortgage.