What Does The Interest Base Rate Increase Mean For Those In Debt?
The beginning of this month saw the Bank of England raise the base rate for the first time in 10 years from 0.25% to 0.5%.
Rises in interest rates such as this can influence the cost of borrowing or the rate of interest charged by lenders – so what does this recent
increase mean for those in debt?
Impact of interest base rate rise for current mortgage holders
When, and if, your mortgage repayments change as a result of the base rate rise will depend on the type of mortgage deal that you have and when this deal ends.
It is variable rate tracker mortgage customers that are likely to experience an immediate increase in mortgage payments in the event of any interest rate rises, as these deals ‘track’ the base rate. Whilst those on standard variable rate mortgages will also probably see an increase in the sums owed when interest rates rise, however the amount will be determined by their lender.
Those on fixed rate mortgages will only likely be affected once they reach the end of their current mortgage deal, as interest rate rises will most likely make re-mortgaging more expensive.
Impact of interest base rate rise for current borrowers
Non-mortgage forms of borrowing may also be affected by an interest rate rise, for example any current borrowing in the form of credit cards, loans or overdrafts. However, the majority of this type of borrowing won’t be affected by the base rate rise if it is an unsecured loan (based on an individual’s creditworthiness rather than any type of collateral) and a fixed rate of interest has been agreed when the loan was first taken out.
This is not to say that an interest rate rise on your credit card or overdraft cannot occur, although these changes wouldn’t be directly linked to any base rate changes. If your loan provider does choose to increase the interest payable on your debts you will be given notice before this happens which will be subject to the T&C’s on your individual account. If you choose to change providers due to the increase you will have an option to cancel the credit card and repay any outstanding debts within 60 days, with the interest during this time being charged at the lower rate.
Impact on future borrowing
As mentioned above a rise in the base rate is likely to make the cost of mortgages and re-mortgaging more expensive.
With regards to future non-mortgage forms of borrowing this is where the increased base rate will have a larger influence, with the majority of lenders increasing the cost of borrowing for new customers.
Although it is not likely that there will be another base rate rise immediately, with the Bank of England governor Mark Carney saying: "The Monetary Policy Committee continues to expect that any future increases in interest rates would be at a gradual pace and to a limited extent." It is always wise to plan ahead for future increases. For example if interest rates were to increase by 1% or 2% this may impact people’s ability to pay other fixed costs such as council tax, utility bills etc. If you are looking for free money advice on the recent base rate increase or need help planning for future increases you can contact
Scotland’s Financial Health Service who can direct you to an appropriate advice agency.
If the recent changes in interest rates have compromised your ability to send repayments towards your outstanding debts to AMA, please get in contact with our team as soon as possible so we can ensure you are on the most suitable repayment plan for your current financial circumstances.