Interest rates have been in the doldrums for two years, but have slowly been creeping up in recent months. The Bank of England’s last move was to increase its base rate to 1.25 percent, however, a new decision is due next week.
Markets have predicted another rate hike, this time of 0.5 percentage points which would raise the base rate to 1.75 percent.
However, the gap between interest rates and inflation has continued to grow as the Consumer Prices Index (CPI) recently hit 9.4 percent.
The troubling economic climate could have challenging circumstances in store for many.
Laura Suter, head of personal finance at AJ Bell, said: “With the leap in inflation in May, better-than-expected UK growth figures and some pretty bullish comments from a number of the rate-setting committee, an interest rate rise feels inevitable.
“What’s more, we’re odds-on to see the biggest increase in interest rates since 1995 as it’s widely expected that the rate setters will hike rates by 0.5 percentage points.
“Such a move would take rates to 1.75 percent, and back to levels we’ve not seen since 2008. The move by the Bank will pile more misery on the 1.9 million people with variable rate mortgages as they battle the rising cost of living. Likewise, anyone in debt will see their costs rise.”
Ms Suter described savers as the only potential “winners” of any rise to interest rates.
Banks have already upped the ante on their offerings in an attempt to entice further custom, and savers are now more likely to receive a solid rate for the cash they have put away.
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“One word of warning is in the fixed-rate savings market, where we’ve seen providers swarming around the best buy tables and progressively hiking rates in order to top them.
“Any fixed-rate you lock in today will mean missing out on future interest rate rises – banks aren’t stupid, they are trying to draw in money now to make more profits if rates rise further.
“We’re still expecting the Bank to continue rate rising this year and well into next year, which means locking in a fixed rate savings account today means missing out on any of those increases.”
An interest rate rise may also mean complications ensue for those exposed to the mortgage market: individuals on a standard variable rate (SVR).
If the Bank hikes its rates next week, it is thought around 1.9 million homeowners could face increases to their mortgage rate.
Ms Suter explained the consequences in real terms, adding: “For someone with £200,000 of borrowing, a rate rise of 0.5 percentage points will add another £624 onto their mortgage costs each year – or £52 a month.
“That’s enough on its own, but coupled with all the previous rate rise increases since December last year it means mortgage holders on a tracker deal will have to stomach a 1.65 percentage point increase in their interest costs over the past eight months.
“For someone with £200,000 of borrowing that’s an extra £2,088 a year in costs.”
As a result, she encouraged those on an SVR who are able to switch to do so, as they may be able to jump on a safer, lower rate than is expected in the coming months.
As with any decision, it is often considered important for Britons to speak to a financial advisor or mortgage broker before taking any major steps.