How to manage your money as interest rates are rising

On 3 August 2023, the Bank of England (BoE) raised the base rate for the 14th consecutive time since 2020, bringing it up to 5.25%. That represents the highest level since 2008. The BoE also confirmed that it would be keeping the rate at this level after the latest review on 21 September.

The base rate determines interest rates across the rest of the economy, and is a tool the BoE can use to try and keep inflation at its annual target of 2%.

Generally, the BoE decreases the base rate when inflation is low. In theory, this makes saving less attractive and borrowing cheaper, encouraging spending that stimulates the economy.

Meanwhile, it increases the base rate when inflation is above the 2% target – as it has been every month since August 2021 – to encourage saving and make borrowing more expensive. In turn, this can help to dampen spending, slowing economic growth.

For you, rising interest rates can change elements of your finances – in particular, you might see rates rising on your savings, as well as on borrowing such as a mortgage.

So, find out how to manage your money while interest rates are rising.

You may want to try and find a higher interest rate for your savings

When interest rates rise, the first step you might consider taking is looking for a savings account with a higher rate.

This can be worth doing as, according to BoE figures reported by MoneyAge, there is more than £250 billion in cash accounts receiving no interest at all.

If this describes some of your cash, you’re far from alone. According to Wales Online, half of Brits have never switched their cash to a different account, despite receiving limited interest on their money for extended periods.

So, now might be an opportunity to reassess your savings and see whether you could be receiving more interest on your money.

As of 21 September 2023, Moneyfacts shows the highest rate available on various types of savings accounts to be:

  • 5.1% for an easy access savings account
  • 5.35% on a 90-day notice account
  • 6.1% on a one-year fixed-rate bond
  • 5.85% on a five-year fixed-rate bond.

If you’re currently receiving minimal interest on your cash, switching to a different account could allow you to earn more.

Bear in mind that you will need to be comfortable not accessing your money for an agreed period with some of these accounts.

Higher savings rates may not be as good as they seem

While increasing savings rates may seem like a positive, it’s important to keep in mind that there are still drawbacks to holding money in cash.

The Office for National Statistics recorded inflation in the 12 months to August 2023 to be 6.7%. Yet, the highest rate listed from the Moneyfacts data above is still only 6.1%.

So, although you might be receiving more in interest, your money is still losing value in real terms, compared to the rising cost of living. As a result, you may want to consider other ways of managing your wealth to ensure it retains its value, such as investing a portion of it.

Furthermore, you may want to be aware of a possible tax bill if you’re receiving more interest on your money.

The interest your money generates is essentially income, and so is potentially subject to Income Tax. That said, you do have a threshold of interest you can earn before tax is payable. This is called the “Personal Savings Allowance” (PSA).

In the 2023/24 tax year, the PSA is:

  • £1,000 for basic-rate taxpayers
  • £500 for higher-rate taxpayers
  • £0 for additional-rate taxpayers.

When interest rates are lower, you’re generally less likely to exceed the PSA as you would need to be holding substantial amounts of cash to see your interest become taxable.

However, as interest rates rise, this becomes more of a possibility. For example, with Moneyfacts showing the highest rate on an easy access account to be 5.1%, that means you would only need to hold £20,000 in savings before it becomes taxable if you are a basic-rate taxpayer.

For higher-rate taxpayers, this is just £10,050. You’ll face 45% tax on all your interest as an additional-rate taxpayer as you’ll have no PSA at all.

It’s possible to mitigate this charge by holding your money in a tax-efficient environment, such as in a Cash ISA or your pension.

But otherwise, you may end up having to pay tax on interest held in a regular account. You may want to factor this in before chasing higher saving rates.

Check when your current mortgage deal ends

Alongside savings, the other key aspect you may want to consider when interest rates rise is your mortgage.

If you have a variable- or tracker-rate mortgage, you may have already seen your mortgage repayments increase. In that case, you could consider finding a suitable fixed-rate deal.

While the rate on this might not be lower, at the very least you would be protected from further interest rate rises during the fixed period. This can offer valuable peace of mind over what your repayments will be.

Meanwhile, if you are currently on a fixed-rate mortgage deal, rising interest rates won’t affect you until the fixed period comes to an end. However, when it does, you’ll either have to start paying your lender’s standard variable rate (SVR) or remortgage to a new deal.

According to the Guardian, there are more than 2.4 million deals coming to an end in 2024. If yours is one of them, you may well face higher repayments when the fixed period ends.

Remortgaging is likely to be more expensive now than it was previously, especially for fixed rates. In fact, the Times Money Mentor reports that the average two-year fixed rate reached 6.66% as of 19 September.

That’s higher than the 6.65% peak seen in the wake of the mini-Budget under Liz Truss in October 2022, Sky News reported in July.

This figure was calculated before the BoE confirmed that the base rate would remain at 5.25% in September. So, the averages could change quickly in response to this news.

As a result, it may be sensible to speak to an expert if your rate has increased, or if you have a fixed-rate mortgage that comes to an end soon.

Get in touch

Need help managing your money amid rising interest rates? Please get in touch with us at Britannic Place.

Email or call 01905 419890 to speak to us today.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Get in touch, we’d love to help you

If you have any questions or queries, a member of the team will always be able to help. Feel free to use the form below or contact us via phone or email.