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How would a UK interest rate rise affect people?

After a sustained period of low interest rates in the UK on 12th June 2014, the Governor of the Bank of England Mark Carney indicated a rise in interest rates could happen ‘sooner than markets currently expect’.

For some people this will be welcome news, for others this may cause great concern and many will be wondering what all of the fuss is about.

Generally speaking low interest rates are great for borrowers. This is because it is cheaper for them to borrow money. An increase in interest rates will over time lead to higher borrowing costs*. Clearly borrowers will not be looking forward to any interest rate increases.

On the other hand, low interest rates are normally bad news for savers. This is because they receive less interest on any savings they have deposited with banks and building societies. An increase in interest rates is general speaking good news for savers, as over time they should receive more interest on their savings*.

Savers also need to consider inflation. Ideally savers want to receive an interest rate on their savings in excess of inflation. When savers receive an interest rate lower than inflation, the purchasing power of their money decreases. This means over a period of time their money (including any interest earned) will be able to buy less.

It is crucially important to take independent financial advice before making any financial decisions. Farrell Financial Planning are whole of market independent financial advisers based in the Scottish city of Glasgow. Contact us to find out how our expertise could help you plan for your financial future.

Farrell Financial Planning do not give advice on future interest rate movements.

* Future changes to interest rates will not necessarily affect borrowers or savers immediately. When fixed rates of interest are applied, any change to interest rates would normally not make an impact until after the end of the fixed rate period.

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