We have recently seen lenders hike up the prices for mortgage funds causing millions of people a much higher rate on their mortgage bills with some at a staggering 7%.

The BBC informs us that banks such as HSBC, NatWest and Virgin Money are all increasing the cost of new deals.

Why are mortgage interest rates rising?

Interest rates continually change to help control inflation and ease the cost-of-living crisis.

The Bank of England sets the base rate, currently at 5.25% which is what it costs lenders to borrow the money to then lend out to customers.

If inflation is going up then interest rates will often follow to try and dissuade people from spending and lowering the demand.

Does this affect you?

If your mortgage term is set to expire this year then the higher rates could affect you when you remortgage. An estimated 1.6 million deals will expire in 2024, according to Banking Trade Body UK Finance and these will be affected by the change in interest rates.

Those on a fixed rate mortgage will not be affected as the rate was agreed at the beginning of the term and remains the same throughout.

If you are on a Tracker or standard variable mortgage then your monthly payments could rise substantially.

Find out What the Different Types of Mortgages are.

Turkey’s currency tumbled dramatically over the weekend as President Recep Tayyip Erdogan sacked the head of the country’s central bank.

Naci Agbal, who had been credited as playing a key roll in pulling the lira back from historic lows, was replaced in a surprise move on Saturday. Agbal’s removal marks the first change in the central bank’s governorship in under three years.

Agbal was appointed in November and had been raising interest rates to combat an inflation rate that ran above 15%. Two days after increasing Turkey’s interest rate by 200 basis points, Agbal was replaced on Saturday by Sahap Kavcioglu, a former banker and lawmaker who shares Erdogan’s opinion that high interest rates lead to increased inflation.

The change in central bank leadership caused local and foreign investors, who had been enticed by Turkey’s 19% interest rate, to pull their money out of the country. Lira fell as much as 14% against the euro following Kavcioglu’s appointment, and the Turkish stock market in Istanbul shed over 9%.

Every sector was badly hit, with financial stocks leading the selloff down 9.29% on Monday trading. Industrials, the least impacted sector overall, fell 6.43%.

Government bonds also suffered a record daily drop on Monday, wiping out the gains made during Naci Agbal’s tenure.

Jason Tuvey, senior emerging markets economist at Capital Economics, told the Financial Times at the time of Agbal’s firing that the leadership change might spark a currency crisis in Turkey.

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“Erdogan’s move leaves little doubt that all of the power in Turkey rests with him, and this will result in rate cuts,” Tuvey wrote in a research note, warning that lower interest rates would only worsen Turkey’s inflation problem.

In a statement on Sunday, the central bank said it "will continue to use the monetary policy tools effectively in line with its main objective of achieving a permanent fall in inflation".

John Ellmore, Director of NerdWallet, discusses the significance of negative interest rates and how savers can adapt to them.

Many Britons will have hoped that 2021 would provide some respite from the intense financial pressures of 2020. Unfortunately, this is unlikely to be the case – in fact, new and potentially unique challenges lie ahead.

COVID-19 has had a hugely significant impact on the UK economy: 314,000 redundancies were reported between July and September 2020 alone, Government spending rose by £280 billion last year, and public borrowing in the past 12 months is estimated to be the highest in peacetime history at 19% of GDP.

The Government and Bank of England (BoE) have had to act in order to stimulate the economy and limit the damage. For one, in March 2020 interest rates were cut to a historic low of 0.1%. However, the cut might not have gone far enough and, over recent months, the BoE has been debating lowering rates below zero; going as far as to issue a letter to all UK banks, urging preparedness for base rates to drop to negative figures.

This policy is not without its merits. After all, it will encourage commercial banks to lend more, and consumers to spend more, therefore fuelling economic growth. However, negative rates are unlikely to be viewed as optimistically by savers.

The impact of negative interest rates

While negative interest rates make borrowing cheaper, they have the opposite effect on savings.

When rates fall below zero, it becomes more expensive for commercial banks to keep customers’ money in savings accounts. Theoretically, this could force commercial banks to charge savers for holding their money. However, this scenario is not likely, as doing so would inevitably drive the majority of clients to rapidly withdraw their savings from banks. This would, in turn, cause a massive economic aftershock.

While negative interest rates make borrowing cheaper, they have the opposite effect on savings.

That said, even if commercial banks do not impose such fees, the value of many people’s savings could decrease over time; it certainly will in real terms, given the UK’s inflation rate currently sits above 0.5%.

The question, therefore, is what can savers do to protect their money?

Keep calm and research different options

Crucially, Britons must not panic. Doing so may result in rash or ill-informed decisions, which could damage their long-term financial prospects. Instead, it is important to dedicate time researching the various savings options available.

For more risk-averse savers, there are savings accounts available which still offer relatively generous interest rates. For example, there are fixed-rate savings accounts offering up to 1.25% in interest, while some instant access accounts can offer savers as much as 0.6%.

People most thoroughly research their various saving options. Comparison websites are a good starting point, as they search the market for different financial options and present their findings in a clear, jargon-free table. So, users can simply select the savings account that best suits their needs.

Consider investments 

However, some savers may want their money to work a bit harder. In which case, they might want to look into other options, such as stocks and shares ISAs.

These are tax-efficient investment accounts, which enable savers to put their money into a range of different investments – these can either be chosen by the saver themselves, or by the ISA provider.

Stocks and shares ISAs present an opportunity for generous returns on savings, should the investments be successful. However, this also means that the value of savings could decrease, if the value of investments falls. So, those contemplating starting a stocks and shares ISA should carefully consider their risk appetite before committing to this savings strategy.

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Premium bonds accounts

Another alternative savings strategy comes in the form of a premium bonds account. This entails adults purchasing bonds for £1 each; £25 worth of bonds being the minimum amount one can purchase. Instead of gaining interest on their purchase, customers are entered into a monthly cash prize draw in which they could win a tax-free sum of between £25 and £1 million.

What’s more, 100% of an individual’s investment is protected, so investors will always break even, even if they never win a prize draw.

That said, the odds of savers winning money are not particularly encouraging; it is estimated that 1 in 54,656,068 people win £1,000 each month. So, while perhaps a more fun alternative to a traditional savings account, this strategy might not be suited to those looking to make more significant or predictable gains on the value of their savings.

The prospect of negative interest rates will be unnerving to many savers. However, it is important to remember that there are alternative savings routes available. Finding the right one will involve dedicating time to researching different options; but if Britons do their research and make informed decisions, they should be able to save for the future with confidence.

As expected, Mark Carney and the Bank of England have risen the UK interest rate for the first time in 10 years, stating that: “The time has come to ease our foot off the accelerator”.

The rate has risen from 0.25% to 0.5%, returning it to the same levels it was prior to a drop following the Brexit referendum result in June 2016, a move designed to stabilise the economy during a tumultuous market in the wake of the landmark vote.  The MPC (Monetary Policy Committee) voted by a score of 7-2 in favour of an increase, but has sought to curb any major fears of a quick rise and retain a level of cautiousness by stating in its report that, “All members agree that any future increases in Bank Rate will be at a gradual pace and to a limited extent”.

The rate rise has been expected to happen for some time and is seen by many as a direct response to protect British households from creeping inflation.  Mark Carney, Governor of the Bank of England, is tasked with keeping inflation at a target mark of 2%, however September saw it rise to 3%, its highest figure since 2012.

The rate increase was also announced in tandem with an upgrade on the growth forecast for this year, which has been raised from 1.3% to 1.5%.  The projections for 2018 have also been upgraded, and while this may sound promising for those who championed leaving the EU, the Bank of England has been very clear in asserting its position that Brexit is, and will remain, harmful to the UK economy.  The report states that Brexit is causing ‘noticeable impact on the economic outlook’, citing the ‘uncertainties associated with Brexit’ and ‘Brexit-related constraints’, as having a detrimental effect on the financial system.

For the average UK citizen, there are some concerns that the cost of borrowing will now increase and therefore negatively impact those applying for mortgages and loans.  The move is also expected to affect homeowners on interest only mortgages who have been enjoying low repayments with the potential to increase monthly payments.  With nearly 4 million homeowners currently on variable or base-rate trackers, an increase of up to £12 per month could be seen for those with the average repayment loan of around £90,000 on their mortgages.  There is also concern that many people who have never seen a rate-rise in their lives will be caught unexpected, and this could further squeeze a population where falling wages and consumer debt are prevalent.

The British pound fell sharply immediately after the announcement, but many analysts are still seeing this as a ‘one and done’ rise and do not expect to see any further changes emanating from the Bank of England until the terms of Britain’s Brexit is defined.

Today the Bank of England has decided to take on the role of a supportive friend following Brexit with a 0.25% rate cut (from 0.5%) and some more quantitative easing. That’s basically when the Government prints money and flushes it into the economy, trying to give it a double espresso. What does this mean for the rest of us?

Savers
It’s another nail in the coffin for savings rates. Any saver who had hoped that we might revert to a time when you actually got paid some meaningful interest for holding money in a savings account will be sadly disappointed. Santander’s 123 account is still probably your best bet for cash balances of £3,000 – £20,000 in an easy access account. They have a £5 monthly account fee so check the interest outweighs the charges. Nationwide pay 5% on balances of up to £2500. But do keep an eye on things over the next week as we’d expect to see changes. More recently NatWest has told business customers that it might charge them for the privilege of holding their cash – welcome to negative interest rate discussions which feel counter-intuitive to the world order we know!  Watch this space….

Investors
Stock markets have generally liked interest rate cuts. Why? Well the basic thinking is that it’s cheaper to borrow for businesses, so companies large it up and hire more, build more and make more. And customers are more likely to go on spending sprees.

To all those cheesed-off savers: although the stock market bounces around, you can still get about 3% – 4% in income every year from some funds and stocks in the UK. This income is what we call a yield. And as well as the income (not guaranteed or fixed rates) you also have exposure to the investments themselves. Which can go up and down.

Have a look at this for details on Equity Income funds we like. 25% of Brits stick in cash and are suspicious of the stock market, but interest rates are at 300 year lows!!!

So is it time for a Plan B!? We think that for those of you in this suspicious camp with savings horizons of five years plus (Junior ISAs, pensions, ISAs earmarked for goals at least five years off…) – well, it could be time to take a deep breath and to stick a toe in the investment waters.

If you don’t understand markets and don’t want to understand them, that’s cool. Here’s how you can sort this quickly and painlessly without getting ripped off. Welcome to the investment ready-meal. A fund. Let someone else choose and blend the ingredients for you.

Homeowners
The cut may mean slightly lower mortgage rates, but in practice, they are so low anyway that it is not likely to make the marginal difference for the actual housing market. In practice, the housing market is much more likely to be influenced by consumer confidence (which is very weak), stamp duty rates (which are very high) and employment levels, which are reasonably stable for the time being (though there may be some nerves over job prospects in the wake of Brexit). The housing market is slowing and this is likely to continue.

Borrowers
If you’re in the market for a mortgage, do have a look at some of the fixed rate deals out there. Debt is cheap. It’s never been so cheap. So make sure any new mortgage OR your existing one is properly cheap!!!

Nevertheless, the usual rules apply. Loans still have to be paid back, and not all debt is created equal – credit card and overdraft debt is still very expensive, for example. You still need to check your rates and make sure you’re getting a good deal.

There is a valid question over whether all this tinkering by the Bank of England will work. Interest rates are already cheap, and may not significantly alter the behaviour of consumers or companies when we’re all scratching our heads over Brexit and wondering how the flipping hell this is all going to play out. Equally, it could be said to send a bad message. Are we supposed to believe everything is normal when these emergency measures are still in place? Time will tell...

(Source: www.boringmoney.co.uk)