Winners and losers from rising interest rates revealed – how are you affected?

RISING interest rates are a nightmare for mortgage holders but millions of Brits could still benefit from the hikes in the long run.

The rising cost of borrowing could help millions of young Brits boost their nest pots and get on the property ladder.

The Bank of England increased the base rate of interest from 4.5% in May to 5% in June.

Interest rates are now at their highest level in just under 15 years since September 2008.

It is also the 13th time in a row that the BoE has raised rates since December 2021 when they were at historic lows.

The Office for National Statistics will release its latest inflation figures on Wednesday, July 19.

Inflation remained at 8.7% in May, but if it won’t budge, the Bank of England may be pushed into raising interest rates again next month.

The move increases the cost of borrowing, including through loans, credit cards and mortgage repayments.

But the Resolution Foundation has said today that higher rates in the long term could help the younger generations out financially.

Here’s a full list of the winners and losers from interest rate hikes revealed.

WINNERS

First-time buyers

The Bank of England’s rapid rate-rising cycle has led to a rapid rise in the cost of mortgages.

But at the same time, house prices have fallen at their fastest rate for 12 years because higher mortgage rates are now hitting buyer demand.

They were down 2.6% — or £7,500 — in June compared with the same month last year, according to Halifax.

It is the biggest annual slip since 2011, leaving the average cost at £285,932.

A drop in house prices will directly benefit prospective first-time buyers.

It could do this by reducing the number of years it takes for first-time buyers to save for a 10% deposit.

Back in the mid-1990s, it would have taken a typical first-time buyer couple around eight years to save for a 10% deposit, according to the Resolution Foundation.

While this figure has risen to 14 years today, it could fall back to around ten years if house prices continue to fall.

Savers

Interest rate hikes are good news for savers as banks will continue to battle it out to offer market-leading interest rates.

Savers looking to make the most of their deposits can expect to get more back after savings rates rise.

Traditional high-street banks have been accused of resisting passing on higher interest rates to savers in recent months.

But savvy savers can still get decent returns on their deposits by looking away from traditional high street banks and scouting for accounts offered by challenger banks.

Anyone currently getting a low rate on easy-access savings might want to look around for a better rate by using comparison sites like MoneyFactsCompare.

Young people saving into a pension will also benefit from rising interest rates.

This is because they can now put away less and get more in return.

In the low-interest pre-pandemic world, a typical worker would have needed to save around £5,000 a year to achieve an income in retirement worth two-thirds of their income prior to retiring.

But under today’s higher interest rates, the same worker would need to save around £3,000 to achieve that same standard of living in retirement, according to the Resolution Foundation.

Retirees

Interest rate rises can also be good news for pensioners about to buy an annuity.

Annuity rates are linked to the cost of government borrowing and pay a guaranteed income for life.

The income you receive can be locked in on the day you purchase your annuity, so current annuity rates can make a big difference to your long-term financial security.

If you’re looking to buy an annuity, an interest rate rise can be very good news as it means you’ll probably get a better rate of return.

People who have already taken out an annuity can’t switch, but you can still benefit from better interest rates by putting the money from your annuity into a savings account with a better rate.

Shoppers

The Bank of England has acted to increase interest rates to try and put a lid on runaway inflation.

And food price inflation has seen the biggest drop since its peak in March but remains “incredibly high”, figures show.

Supermarket promotions helped the figure fall to 14.9% in the four weeks to July 9, down from 16.5% over the previous month, according to analysts Kantar.

It is the fourth month in a row that food inflation has fallen from its peak of 17.5% in March.

Households would have spent £683 more on their annual grocery bill to buy the same items as they did a year previously under the current level of inflation but have adapted their habits to limit the increase.

However, if interest rates continue to rise, the rate at which food prices increased could continue to fall.

Homeowners on long-term fixed mortgages

Mortgage rates for people on tracker and variable deals have been rising since December 2021.

But if you happened to take out a five or ten-year fixed mortgage deal when rates were at a historic low in 2021 you’ll be protected in the long run.

Borrowers on fixed-rate mortgages have been cushioned from the immediate impact of interest rate rises so far – because rates don’t change within a fixed deal’s term.

You can’t predict how the Bank of England will manage the base rate in the future, but if rates were to fall again within the next few years, you might miss out on mortgage shock when your deal comes to an end.

LOSERS

Other mortgage holders

Millions of homeowners on tracker and standard variable rate mortgages are being pummelled with rising interest rates.

Tracker mortgages are linked directly to the BoE base rate – which means you will see an immediate impact on your mortgage repayments whenever rates go up.

Homeowners on variable rate mortgages might not see their repayments go up straight away, but they tend to increase within a few days of interest rates rising.

But 1.7 million households on fixed deals that expire next year face a huge mortgage shock.

It will see the average annual repayments rise by over £3,000.

Customers who wish to prepare for the shock can usually lock into a new fixed deal six months ahead of time to soften the blow if rates were to rise again in the coming months.

New borrowers

The cost of borrowing through loans, credit cards and overdrafts could go up if interest rates continue to rise.

After consecutive rate rises by the BoE, interest rates on credit cards and personal loans hit a record high in December 2022, according to MoneyFactsCompare.

Many big lenders – like Lloyds, MBNA, Halifax and Barclaycard – link their credit card rates directly to the Bank of England base rate.

That means their credit card rates will hike automatically in line with any changes to interest rates – but you’ll be given notice before this happens.

The average purchase APR offered to credit card customers has risen from 26.7% in July 2022 to 31.2% in July 2023.

The cost of taking out an unsecured loan has also risen substantially in the last 12 months.

Figures from MoneyFactsCompare show that the average interest rate on a £5,000 personal loan over three years has risen by 2.3 per cent points to 9.7% since July 2022 when it was 7.4%.

People who owe the taxman

HM Revenue & Customs (HMRC) charges interest on unpaid taxes and the rate is linked to the Bank of England base rate.

Late payment interest is set at the base rate plus 2.5%.

This means that customers who don’t pay their taxes on time now face a 7.5% late payment fee, up from 7%.

You’ll be liable for late payment charges from the date the payment was due until the date at which HMRC receives the payment.

If interest rates continue to rise – so too will HMRC’s late payment charge.

The best thing you can do to avoid the new late repayment fee is to make sure your taxes are paid up on their set due date.