Who Benefits When Borrowing Rate Rises ?
Historic inflation figures has forced the Bank of England to increase Interest rate the second time in three months. No doubt, the upbeat beneficiaries are investors, banks, home loan lenders and credit card providers. For investors, the previous unattractive rates has just gotten very attractive particularly those with index-linked accounts such as Individual Savings Accounts or TESSAs. For banks, they feel justified in increasing their lending rates even further. For credit companies, time to rub their hands in glee as they increase their already extortionate rates. For changing rate mortgage or loan holders, well the game just got a bit more expensive.
Give or take, a huge section of the population may not like a hike in interest rates, but higher rate taxpayers can now enjoy the equivalent of 9.25% per annum which is 4% more than normal savings accounts. For base rate taxpayers, this figure is around the 7.5% mark. Returns from fixed-rate bonds is also increasing. Birmingham Midshires, has now launched a one-year fixed rate bond which will pay 6.05% gross. This is better than some of the best margins offered on normal products which stands at around 5.6% on average and 5.9% at best. With further interest rate hikesexpected this year, savers are bound to reap even more bumper harvest, as there is likely to be more deals with 6% or more as rate of return. Keeping money in the bank, in tax-free, index-linked accounts means you can to save a certain fixed sum every year. Coming with the tax-free tag makes it a positive option for any serious would-be investor.
The trouble with rate increase is that it affects everyone one way or the other. Increase business expenses are directly passed onto the consumer in retail prices. The domino effect happens as there is the sense of everything being expensive, thus consumers do not spend as much as they would want to. This in turn affects retail profits and the cycle continues. For the unlucky few, insolvency moves from being a possibility to a reality. Should this happen, the results can reveberate for several years. Bankruptcies remain on the record for a minimum of 7 years and sometimes even up to 10 years. During this trying time, acquiring credit can be very difficult and if acquired it is usually expensive. Low interest credit cards will become a thing of the past. To make matters worse, some energy companies will install pre-paid meters once they acquaint themselves with your credit history. Pre-paying for energy whether gas or electricity is without a doubt more expensive.
If you are finding it difficult, you may realise that, making small but considerable changes can help improve credit rating after base rate rises. If you are on a changing rate for your mortgage for example, it is adviceable to move to a fixed rate. Bear in mind that you may have to pay for chaning. Some creditors will charge you a certain percentage of your total borrowing if you opt out of your contract, whereas some may not charge anything at all. Other charges include arrangment fees which can be anything from 100 to 1200. Other ways in which improve credit includes paying bills on time whether it is credit cards or energy bills as well as home loans.
Bottom line is that, while interest rates increase may be beneficial to investors, generally they affect borrowers in a negative way and the consequences can echo for a long time to come, both in people's personal lives and businesses.
