You’ve piqued my interest (rate) – how the interest rate hike affects you

The Bank of England has recently increased the interest rate from 0.25% to 0.5% after the Monetary Policy Committee decided that inflation has reached worryingly high levels. It has been a decade since the last rate increase and some worry that the lessons of the 2007-8 financial crisis have already been forgotten. However, inflation is the Bank of England’s key concern at the moment, especially as it has already exceeded the target rate of 2%. As people are spending more, demand is increasing which raises the prices of many products. Raised interest rates signal a desire to curb borrowing, therefore reducing the level of expenditure in the economy. Those most affected will be mortgage payers, while customers with saving accounts are set to gain the most.

When asked whether they knew what the current base rate was, 87% of teens surveyed admitted they didn’t know the answer or got it wrong…

But what does this mean for you, when mortgages seem like they’re still a world away and the bank of Mum and Dad might be the only one you’re truly familiar with? If you’re feeling rather clueless about the matter and, quite frankly, feel like you could do without the stress of thinking about it all, you’re not completely alone. Research carried out by MoneySuperMarket.com, an insurance comparison site, shows just how clueless “teens” are compared to their adult counterparts. When asked whether they knew what the current base rate was, 87% of teens surveyed admitted they didn’t know the answer or got it wrong, compared to 57% of adults that were asked. In some ways, these figures aren’t much of a shock.

According to MoneySuperMarket, “Adults” are more likely to own a mortgage and a savings account compared to a teenager who is likely to be living at home and supported by those very adults. But another key finding of the survey is that just because you’re an “adult”, does not mean you are completely aware about all matter of interest. 50% of adults and 49% of teenagers didn’t know how monthly mortgage payments would be affected if the interest rates were to increase by 1%. The insignificant difference between adults and teenagers who didn’t know indicates that there is no guarantee that an adult will know more than a teenager about interest rates. Regardless of age, some research and time needs to be set aside if we are to truly understand what the Bank of England’s decision will mean for you.

Only those who started university between 1988 and 2011 will see an immediate interest increase on their loan repayments…

Even more revealing, however, was MoneySuperMarket’s findings on gender attitudes towards loans and finance. Whilst there wasn’t much disparity between the number of men who incorrectly identified the meaning of interest rates (51%) in comparison to their female counterpart (59%), men were more likely to claim themselves to be the more knowledgeable person on matter regarding interest rates. 69% of men replied that they knew more about rates compared to 29% of women. It is also intriguing to see how likely women were to name their spouse as more knowledgeable, as opposed to men: a shocking 22% difference. The result suggests that men are much more confident about their knowledge on interest rates than women, despite being almost as likely to incorrectly identify the true meaning of “interest rate”.

Whenever you become eligible to pay back your student loan, whatever the inflation rate is at the time, plus an additional 3%, is the interest you will be paying…

What this ultimately reveals, is that regardless of gender or age group, people need to be refreshed on their knowledge of interest rates and its implications. Not only are mortgages a real possibility in the coming future, student loans will also be affected by the increase. MoneySuperMarket money expert Sally Francis concedes that only those who started university between 1988 and 2011 will see an immediate interest increase on their loan repayments, starting from 1 December . However, these graduates only pay a rate of interest of 1% more than the current base rate (1.5% now with the recent increase). For those who started after 2012, the rise in the interest rate won’t directly impact your student repayments as these are calculated by adding 3% to the current rate of inflation and is not added to the interest rate. As Francis explains, “at the moment it stands at 6.1% – over 12 times the new base rate. We’ll have to wait until March and September to see what the rates for those students will be in 2018.” Whenever you become eligible to pay back your student loan, whatever the inflation rate is at the time, plus an additional 3%, is the interest you will be paying.

Consider changing your current account if you’ve been with your present bank for a while as often banks will reward you £100 for switching to them…

Despite these increasing percentages, you’re likely to be a few years away from paying anything just yet. However, one thing to take away from the recent rate increase is that you need to be savvy when it comes to saving and borrowing. Now is a good time to open a savings account or an ISA – just make sure you shop around and look for the highest interest rate so you can get the best return from your money. It is important to keep in mind that small amounts of cash won’t yield you much in return. Nonetheless, by cultivating a habit of saving and starting the journey now, it can only be beneficial for you in the future. If you can’t save just yet, then you can always consider changing your current account if you’ve been with your present bank for a while as often banks will reward you £100 for switching to them. The key is to make an effort to research and stay up to date on financial changes.