As inflation continues to rise, the Bank of England (BoE) has decided to increase the base rate from its historic low of just 0.1 per cent to 0.25 per cent.
The base rate is often called the interest rate and commonly sets the level of interest that all other banks charge borrowers.
How this increase in the base rate affects you and your wealth will rely on many different factors, which we have outlined below:
Property ownership
The greatest concern from an interest rate rise is that mortgage holders wouldn’t be able to meet the additional costs.
Although most mortgages are offered based on an affordability test (which includes a stress test, should rates rise to 6-7 per cent) there are concerns, given the weakened financial position of many households, that borrowers may struggle.
Understandably, some lenders have already started raising interest rates due to the rate increase, potentially bringing an end to the ultra-low-cost fixed-rate mortgages that many homeowners enjoy.
This is a big issue, as around a third of adults have a mortgage, with most people seeing it as their biggest monthly cost.
A continued rise in rates, even one that is slow and measured as many experts predict, could have an impact on your ability to save and invest.
At the moment around 74 per cent of mortgage borrowers in the UK are on fixed-rate deals. This means that they will only see an increase in interest rates once their deal ends and they either continue on a standard variable rate or remortgage to a new deal.
The remaining UK mortgage holders are either on tracker deals (roughly 850,000 homeowners) or an SVR (1.1 million homeowners). These borrowers have begun to see an immediate increase in their borrowing costs.
Borrowing
People looking to borrow via a credit card, loan or through an overdraft are also likely to see the rate of interest that they pay increase now the base rate has risen.
Many individuals have relied on cheap credit in recent years given the historically low rates of interest, especially with many products offering a long zero-interest payment period.
However, as rates rise the cost of borrowing will increase, which may mean that now is the time to consider paying off debts that have been accrued so that your wealth generation isn’t constrained by the need to pay interest.
Saving
Logic would suggest that as interest rates rise on borrowings, so must they rise on savings as well.
Unfortunately, banking analysts has said that even though the base rate has increased, there is no guarantee that saving rates will increase as well (at least not initially).
They point to the fact that saving rates have continued to fall at a consistent rate regardless of whether the base rate increases or not.
At the moment, most savers are receiving pennies in interest for every £100 they save, leading some experts to suggest that cash savings accounts are no longer useful for wealth generation and are seen more by savers as a way of securing their money.
In fact, data suggests that most savers are completely switched off when it comes to saving, with many people not even knowing the rate of interest on their current savings account.
Investments
Although a rate rise may not have much of an impact on cash savings, it may have more of an influence on the value of stocks and shares.
Historically, some shares tend to perform better than bonds when rates rise. This is especially true for shares linked to other companies’ borrowings.
Conversely, shares or investments in businesses that are indebted tend to perform less well, even in the case of some high growth tech companies, as investors fear the impact that the cost of servicing debts may have on the business.
If you are concerned about the impact of the rate rise on the preservation and generation of wealth, you should seek independent financial advice.