The Bank of England has voted to increase interest rates from 0.25% to 0.50%, the first time a rise has been seen for more than a decade, but what does this mean for you?
For savers, the hope is that the returns on their savings accounts will rise accordingly. The struggle to find a decent savings rate over the past ten years has been well-documented. Back in July 2007 - the last time that the base rate of interest rose – the average easy access account was paying 4.05%; today the rate stands at just 0.39%.
An improvement in rates has been apparent in the past year, with the arrival of several new challenger banks helping spark some competition in the market as they strive to make their mark. As a result, the average two-year fixed rate bond has risen from 1.09% a year ago to 1.44% today.
While the rise in the base rate of interest should help push rates even higher, it may be the case that some patience will be required.
"Given it's been such a long time since the market has seen a base rate rise, it is very difficult to tell whether providers will increase their rates straight away or decide to wait and see what the rest of the market does before making their move," explains Charlotte Nelson, finance expert at moneyfacts.co.uk. "Anyone looking for a savings deal now will need to keep on their toes and check the Best Buys to ensure they are still getting the best rate."
For borrowers, the Bank's decision means that mortgage and loan rates can be expected to rise. Indeed, many already have in anticipation that such a move by the rate-setters was imminent, and unfortunately it is usually the case that banks will be quick to pass on the increased costs of borrowing to their customers, but drag their feet when it comes to improving rates for savers.
However, it must be appreciated just how low mortgage rates currently remain compared with years gone by. In July 2007, the average two-year fixed rate mortgage came with a rate of 6.24%, while it sits at just 2.33% today. Over the same period, the average standard variable rate (SVR) has fallen from 7.41% ten years ago to 4.60% at present.
"Competition in the mortgage market has remained high and borrowers have experienced some of the lowest rates on record," says Charlotte. "However, the speculation prior to today's base rate rise has been causing rates to slowly creep up since September and so this announcement may see an end to the lowest of deals."
It is those borrowers who are on their lender's SVR who stand to be impacted the most. As an example, someone with a £200,000 repayment-only mortgage over a 25-year term can expect a £28.72 increase in their monthly repayments if they are sat on the SVR.
"However, with fixed rate mortgages still low, borrowers will be significantly better off switching deals now before it may be too late," urges Charlotte.
For pensioners, the interest rate rise is likely to be good news, particularly for those who rely on their savings to provide an income.
Those on the verge of retirement who may be looking to secure an income through an annuity could also receive a welcome boost, as the rate increase is likely to see a rise in gilt yields, which help determine annuity rates.
"A significant boost in annuity rates is long overdue, with annuity income having fallen every year since 2014," explains Richard Eagling, head of Pensions at moneyfacts.co.uk. "It will be interesting to see whether any rise in annuity income encourages more retirees to consider the merits of an annuity rather than simply opting for drawdown."
Savers – hopefully better returns are on their way. Patience may be required, but keep checking the Best Buy charts and be ready to make your move.
Mortgage borrowers - rates are on the rise, which means now is the time to take action. If you're thinking of remortgaging, then don't delay, as the cheapest mortgage rates are likely to disappear fast. Check out the best mortgage and remortgage deals to get started, or use our mortgage calculator for a more personalised overview of the options available.
Retirees – higher annuity rates could soon be on the cards, but if you're starting to think about your retirement income, it is essential to get advice. It's one of the most important financial decisions you'll ever make as it'll determine how much income you'll receive for the rest of your life. Comparing annuity rates on the open market is key. Use our no obligation annuity planning service to get started and see the kind of options available.
Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.