Latest BoE rates and impacts

The Bank of England has, once again, responded to rampant inflation in the UK by raising interest rates by a further 25 basis points to 4.5% – the twelfth consecutive hike. Many believe there is more to come.

What is certain is that such monetary policy decisions are likely to have an impact on you and your family’s finances for the coming year. We take  a look at some potential pain points for UK citizens, and also how you could possibly mitigate the effects on your bottom line.

Higher borrowing costs 

When the economy is going through challenging times, it is normal for many people to take out options to further increase their credit, whether through credit cards or loans. But, while the base rate continues to increase thanks to central bank monetary policy, banks and other financial institutions have to respond by increasing the cost of borrowing accordingly. Take into consideration whether any new lines of credit are strictly necessary in the near-term as inflationary pressures begin to abate as the year progresses.

Increased debt servicing 

As well as taking on new credit, many families will already have historic debt that still requires servicing in addition to any potential new obligations. Such examples could be student loans, balances on credit cards or loans for home improvements. With increased interest rates, more of your  monthly budget goes toward servicing this existing debt, leaving less cash for other expenses or savings. 

Your current savings and investments

Higher interest rates can also have mixed effects on your savings and investments. While they may lead to higher returns on savings accounts and fixed-income investments, they can also increase the cost of borrowing for families aiming to finance such investments. People with substantial debt may need to strike a balance between paying off high-interest debts and continuing to save for future goals, such as home ownership or retirement.

Higher housing costs

Rising interest rates can affect housing affordability, potentially making it more challenging for families to purchase homes or afford mortgage payments. Increased borrowing costs reduce the amount families can borrow and may limit their options in the housing market. Some families may need to reconsider their home buying plans, explore different housing markets or housing types, or delay their purchase until they can secure more favourable terms through a mortgage broker.

Less disposable Income

As families face higher borrowing costs and increased debt servicing burdens, their disposable income will likely shrink as a result. This reduction in funds can impact day-to-day expenses, non-essential spending and even family activities and holidays. Families should review their budget, prioritise essential expenses and identify areas where they can cut costs or find more affordable alternatives in the market.

How you can better navigate higher rates

• Build up a rainy day fund – Start putting some money aside for an emergency fund and prepare for any unexpected financial shocks. A robust savings account can help you navigate periods of economic uncertainty or higher interest rates without needing to resort to more costly borrowing options, especially at a time of such high interest rates.
• Reassess your budget – Reassess your budget to accommodate higher borrowing costs and allocate resources efficiently. Trim any discretionary expenses and prioritise essentials to maintain financial stability.
• Refinance existing debt – Consider refinancing high-interest debts to lower interest rates if available and reduce monthly payments. Explore options such as balance transfers on credit cards or debt consolidation to streamline payments and potentially save on interest.
• Explore alternative financing options – Research alternative financing options such as credit unions that may offer more favourable interest rates and loan terms compared to traditional high street banks.
• Seek professional advice – Consult with financial advisors or market experts who can provide guidance tailored to your specific financial situation. They can offer insights on debt management strategies, investment opportunities and long-term financial planning.

Higher interest rates can pose many challenges for individuals and families, impacting borrowing costs, debt servicing, savings, investments and housing costs amongst other things. However, with careful planning, proactive measures and informed decision-making, people can navigate these effects and mitigate potential adverse consequences.