The price of goods and services is on the rise and interest rates have increased. These rates help to control inflation and bring growth in our economy back to normal levels – but high-interest rates can impact us in different ways, from the amount of extra money we earn on our savings to how much we pay back on loans. There are pros and cons when it comes to rising interest rates, read on to find out how they can affect you.
What are interest rates?
Interest rates have an impact on two main factors – borrowing and saving. If you’re a borrower, for example, you’ve taken out bank or direct lender loans, interest rates indicate the amount you’re being charged for the money you’re borrowing in the form of a percentage. If you’re saving, these rates indicate how much money you’ve made on your funds in the form of a percentage – the higher the rate, the more money you will earn on your savings. Changes in interest rates can have a huge impact on saving and borrowing, being aware of the rise and fall is essential.
What causes them to rise?
There are a few reasons that can cause interest rates to rise, one of the main reasons for this is inflation. Currently, interest rates are high due to the impact the pandemic has had on our economy. Banks try to take control of inflation by increasing interest rates – this helps to stop people from spending and promotes the idea of saving. So, how will the rise in interest rates impact your finances?
A rise in interest rates is good news if you’re saving for the future. An increase in rates means an increase in how much you can earn on your savings – and after around a decade of less than impressive rates, savers can look at this as a step in the right direction. It is worth noting that you may not see a lot of difference, as the rates are not high enough to earn you a substantial amount. Of course, it all depends on how much you’ve saved, and this is one of the most positive results that can come with the rise in interest rates.
An increase in interest rates means that mortgages will become more expensive – meaning you’ll have to pay higher monthly payments, resulting in paying more over the course of the mortgage term. There are ways that you can help yourself avoid an increase in monthly payments if you’re looking to buy or re-mortgage. Choosing a fixed-rate mortgage or finding a lower rate could be helpful to protect yourself from paying more than you can afford.
If you’re looking at taking out a mortgage for a new home, choosing a deal with a fixed rate means that your payments won’t increase over an agreed amount of time. This is advantageous and means that the mortgage you choose won’t be affected by interest rate increases.
Another aspect to consider when it comes to rising interest rates is the impact it can have on pension funds. Generally, an increase in interest rates means that people saving for their pensions are likely to see the value of the money they’ve saved, fall. The reason for this is that when interest rates rise, bond prices fall – meaning that pension savers won’t be making as much interest on savings as they have in the past. Luckily, experts believe that interest rates, inflation and the economy will recover over the coming years and will return to more stable levels – so the situation is set to improve!