How to Deal with Interest Rate Changes
Over the past year the Bank of England has increased interest rates from 4.5% to 5.75% in just 12 months. Whilst higher rates benefit savers, it doesn't bode so well for those with a mortgage, especially if you have very little reserve in your monthly budgets.
Luckily savers outnumber mortgage holders 7 to 1, but if you have a mortgage and don't know how to make the best of the interest rate situation here are a few words of guidance from some leading financial experts.
6 tips on riding the higher interest rate wave:
1. Overpay your mortgage where possible
Providing your mortgage deal has this facility, as some banks may charge for doing this, you could save yourself a bundle. For example; someone with a mortgage of £100,000 could save approximately £50 a month by overpaying £10,000 in a lump sum. However if you have debts amounting larger interest, then pay these off first.
2. Switch your mortgage
By switching your mortgage deal to a more favourable one could mean you save money by reducing the amount of interest you pay overall. Decide what mortgage type you want first. Tracker, fixed, discount, variable, offset or capped rates are those commonly available. Then look carefully into the full cost of changing deals and make sure you haven't got to pay a redemption penalty for early repayment. Check interest rates with several banks and building societies. Those with a larger mortgage are best going with a the best rate without worrying about free legal and valuation costs, however those with a smaller mortgage may find they save more money by taking advantage of free legal and valuation costings even if it isn't the cheapest deal on the market.
3. Follow your financial plan - don't panic
Don't forget the basic principles of investment and savings. Ideally you should have an original financial plan - stick to it. Don't be swayed or distracted by daily changes in the financial markets, stock exchanges and interest rates. Investments and long term savers always do better if they leave their money for a longer length of time. Make sure you have a money reserve to cover short-term emergencies so you don't have to touch your longer-term savings.
4. Pay off debts as soon as possible
Try to do this before you increase your savings. Paying off high interest debt should always be a priority as this rapidly reduces your disposable income and prevents you making future savings and plans. It also negates any interest you may earn on your savings. Comparing interest rates between your savings and your borrowings should make this obvious. Being in debt can also have a tremendously negative psychological impact. When debt is paid off you will feel extremely relieved.
5. Use your ISA allowance
An ISA is an Individual Savings Account and acts as a tax-free savings account that anyone can open with their bank or building society. As a taxpayer you will be paying between £270 and £450 tax per year on savings of £10,000 (depending on if you are a basic rate or high rate taxpayer). This can dramatically decrease your savings pot. Try and save through a mini cash ISA, where you can deposit up to £3000 a year tax free or a maxi ISA where you can invest up to £7000.
6. Switch accounts for the best rates
Become a 'rate tart' by switching to accounts where you get you the best deal possible. Banks and Building Societies do not reward loyal customers there is nothing keeping you at a particular provider unless you are benefiting from it as well. Before you do move calculate if the move will be worth your while. To be a rate tart though you need to stay alert - chase the rates and switch when necessary.