Are you ready for a rate rise in 2016?

Updated
Mark Carney speech
Mark Carney speech



As Mark Carney has learned to his cost, trying to predict when interest rates will rise is a difficult business. However, it remains possible that we will see at least one rate rise by the end of 2016, so it's vital to check whether your finances are in the right shape to cope with a rate rise, or whether your mortgage, credit card or savings could leave you with a real headache.

Predictions over whether rates will rise have been swinging wildly. In the middle of 2015 we believed we'd have the first rise by the end of 2015, but the market crash in August changed all that. Towards the end of the year, commentators were pushing back their expectations (there was even talk of the possibility of a rate cut).

As things settled down, there were some who felt that rates wouldn't rise until 2017, some who expected rates to start rising at the end of 2016, some who expected the first rises in the summer of 2016, and some who think there will be rises before June.

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What this shows us is how dangerous is it to base our finances on any kind of a prediction. All we know at this juncture is that rates are at historically incredibly low levels, and at some point they will rise. It means we need to plan now for what we will do when rates eventually do go up.

For many people, the biggest effect on their finances from a rate rise will be a much more expensive mortgage. It's important to factor in the costs of a rise to 1%, 2%, 3% and even 6% - all of which are technical possibilities based on current forecasts, and the path taken during previous tightening cycles.

Consider how much more your mortgage will cost, and whether you can find space for the extra cost in your budget. If the extra cost would cripple you, you could think about making overpayments on your mortgage to bring the debt down before rates start to rise, or fixing the rate. The advantage of doing so when people aren't expecting a rise just around the corner means that you won't have to pay a particularly big premium to fix your rate for five years - and protect against rises until to 2021.

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Any other borrowing that's on a variable rate will need to be carefully considered, as the interest on that will rise with the Bank of England hikes. These debts are likely to be significantly smaller than the mortgage, so now is your opportunity to pay as much of it off as possible before rates begin to go up.

The question of savings, meanwhile, is a bit trickier. As ever, you can get better rates by tying your money up for longer (on the basis that many commentators are predicting that there won't be a rise for a while). However, you are taking the gamble that you could fix your rate, then the Bank of England could raise rates and you're stuck in an uncompetitive product.

Fortunately, you don't have to fix in order to improve your rate. You can look at current accounts paying particularly high interest rates, and regular savings accounts - which both offer better rates of interest than instant access accounts without tying the money up. You can also look at ISAs, so you can save the tax on any interest.

Clearly trying to guess when interest rates will rise is something that even the professionals struggle with. In 2016, most of us would be better off concentrating on what the eventual hikes will do to our finances, and how we can use the time before any rise to prepare for the impact.

U.K. Interest Rates: Is It Time for BOE to Hike?
U.K. Interest Rates: Is It Time for BOE to Hike?



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