How a ‘rate rise’ could affect your debt

Author: Brian Weaver

A change in rate could be a very large challenge for many people. These would include those with an unsecured mortgage debt or those with large, private tuition feeds. However, a change in rate could also be beneficial to those who hold workplace pensions. Here is a handy breakdown of how such changes could affect you, and advice on what you may consider doing next.

Unsecured debt

Interest-rate rises will be felt keenly by the millions of Britons with credit or store card debts, overdrafts or unsecured loans. UK Finance, the organisation representing banks and other finance services, says that households are saving less than at any time in the past 50 years. More than 80 per cent of new vehicles in the UK are financed through personal contract plans.

The Bank of England has urged financial institutions to set aside £10 billion to cover losses if the country suffers a mass credit default in a recession. Financial experts classify debt as being severe if your unsecured loans are bigger than a year’s salary, after tax.

If you get into difficulty, report the matter to your lender and see if there is anything it can do. You could also, like Mr Godfrey, enter into an Individual Voluntary Arrangement, where an insolvency agency will approach your creditors with a plan for repayment.

Variable-rate mortgages

If you are on a standard variable rate mortgage, move to a fixed rate as soon as you can to shield yourself from a rate rise, but watch out for early repayment charges. Halifax yesterday announced that it is adding 0.2 per cent to many fixed rate deals from Monday, Nationwide has put up its two-year deals by 0.25 per cent and West Bromwich raised many five-year rates yesterday.

Savings

The modest mooted rise in the base rate won’t make a big difference to savers, but it will be a move in the right direction. Change accounts if your bank fails to increase your interest.

Pensions

A base-rate rise is generally good for your company pension. Steve Webb, the director of policy at Royal London, a pension company, says: “Low interest rates tend to increase the deficits in company schemes. If interest rates rise, deficits will fall and increase the chance that your company pension will pay out your pension in full — even if the employer goes to the wall.

“On the other hand, a rise may lead to a reduction in the values people are offered when they want to transfer out their company pension,” Mr Webb says.

Investments

Rising interest rates are likely to hit bonds, especially government bonds (gilts), issued by the Treasury to help fund its borrowing. “Long-dated bonds are sensitive to changes in interest-rate expectations because, as the markets adjust to the prospect of higher interest rates, bond yields also adjust by trading at lower prices. Investors with exposure to gilts could experience capital losses if yields spike higher,” says Jason Hollands, a managing director at Tilney Bestinvest, the investment company. “Investors can mitigate these risks by moving to funds that are positioned in favour of shorter-dated bonds that are less sensitive to changing interest rate expectation,” he says.

If you are concerned about the changes in interest rates and what they could mean for your personal finances, there are many charities that specialise in offering debt advice. You are able to contact them anonymously for help and suggestions specific to your own circumstances.