Rising Interest Rates: What This Means for You

26th February 2022

Since the pandemic, particularly over the past few months, interest rates have been on the rise, with rising prices affecting the UK nation, from bills to more expensive grocery products.

Banks expect the rate of inflation will reach over 7% during the second quarter of this year, but by increasing the interest rates, inflation should fall back towards the 2% target over the course of late this year and 2023.

Earlier this month, in hope of bringing the rate of inflation down to 2%, the bank rate was increased from 0.25% to 0.5%. However, with these new rates, it’s important to know how they could affect your personal or business finance. Our experts have broken down a few ways these changes could affect you below.

 

How has inflation changed over the past few months?

January 2021 – in the UK, inflation was only 0.7% at the start of 2021, as measured by the Consumer Price Index (CPI).

June 2021 – CPI inflation increased during summer, reaching 2.5%, and the Retail Price Index (RPI) also increased to 3.9%.

December 2021 – the end of 2021 saw the CPI inflation reach 5.4%, and the RPI rate reached 7.1%.

 

How will increased rates affect homeowners?

Late last year, there were periods of cheap mortgages and good deals were offered for first-time buyers.

Mortgage borrowers who are on fixed-rate deals may only see a change in their repayments when their current term ends, whereas homeowners on variable rates are more likely to feel the effect of the risen rates.

As the bank rate has increased to 0.5%, the typical standard variable rate customer is likely to pay £15.96 more per month on their mortgage repayments.

 

How will rates affect personal finance?

This can affect any of your current loan repayments, as you may end up only paying off the interest instead of the full loan. Not only this, but a rise in rates could also affect:

Pensions – A rise in rates will affect your pension as you may see the value of your pension funds decrease because of falling bond rates unless you have a fixed-rate bond.

 

How will this affect businesses?

Whether you own an SME or a larger business, a rise in interest rates could affect your company. For example, if your business has company credit cards or has current loans, you may face higher interest payments, have less disposable income and have larger overheads. Additionally, with higher rates, it might also be harder for you to obtain new loans for your business.

Since interest rates are on the rise, it’s important to ensure you have a strong business plan for managing your finances, as well as taking advantage of the different forms of tax relief that may be available to you.

Alongside rising interest rates, it is also crucial that your business is prepared for the “cost of living” crisis to ensure it can cope with additional financial pressures caused by soaring energy prices, high inflation and a rising cost of living.

 

How can Edwards Accountants help?

Whether you’ve taken out a loan for your business or personal finance, increased interest rates could affect you and it’s important to know how to manage your finance options if they do.

Our experienced accountants, with the support of our expert West Midlands auditors, can advise on how to plan ahead for the next tax year to best benefit your business. Please contact us to speak to our trusted team.

 

For our West Midlands Offices:

Tel: 01922 743 100

Email: aldridge@edwardsaccountants.co.uk

 

For our East Midlands Offices:

Tel: 01509 357 707

Email: loughborough@edwardsaccountants.co.uk