Smart Living | Lifestyle

Lifestyle | 26 Oct 2022

Cost of living: How to cope with rising UK interest rates

As the Bank of England raises interest rates to combat inflation, here’s how you can find the best deals on savings, mortgages and other debt.

We had all become accustomed to living in an era of low interest rates, but that is beginning to change. Some economists predict that the Bank of England’s base rate may soon need to rise as high as 4% to deal with runaway inflation.

Higher interest rates will affect many parts of our finances, from our savings to our mortgages and other borrowings. Here’s how to make the most of what you have over the coming months.

Supercharge your savings

If you have money in the bank, you will know that it has been a struggle to find an account that pays good interest on your cash. The good news is that when Bank of England interest rates go up, so, usually, do bank and building society savings rates.

The bad news is that when the inflation rate is high, your money buys less as goods and services become more expensive.

This is why it’s so important to shop around for the best rates. Use the financial data websites such as Moneyfacts or Raisin to find safe, better-paying accounts for your cash.

Use your ISA allowance

Putting your money into an ISA account means it can grow tax-free. There’s an annual ISA allowance: currently, an adult can put away £20,000 each tax year (6 April to the following 5 April).

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Make sure your current ISAs work for you

Check the savings rates on existing ISAs and transfer them to a new provider if they are poor. You can also transfer your savings between different types of ISA, but ensure you use the provider’s own transfer service rather than withdrawing the money so that it doesn’t lose its tax-free status.

Consider a Lifetime ISA if you are saving up a deposit for your first home, as the government will pay you a 25% bonus on any savings you put into it. You can put in up to £4,000 a year. It must be used as either a deposit for a first home or as savings for retirement. MoneySavingExpert has a useful guide to Lifetime ISAs.

Is stock market investment right for you?

When the rate of inflation is higher than the interest rate you’re earning on your savings, you’re effectively losing money because inflation is eroding the value of your cash. So you may want to make your money work harder.

Money expert Kim Uzzell, who runs financial course My Money Movement, says that those who already have easy-access cash savings might want to transfer some of their existing cash ISAs into stocks and shares ISAs in the hope that the money will grow faster.

“The growth that investing has potential to provide could give your money the opportunity to keep up with, or preferably exceed, the increasing cost of living,” she says.

But investments in stocks and shares can be risky as their value can go down as well as up, so you need to be comfortable with the risk you are taking.

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Reassess your mortgage

Mortgage rates usually rise when Bank of England interest rates rise, so many are feeling the pain of increased monthly housing costs. So many homeowners, apart from those midway through a fixed-rate deal, should be looking to remortgage.

If you are on a variable rate

Now is the time to see if you can get a better deal. An independent mortgage broker could look at all the products on the market and find the best one for your circumstances – Unbiased will help you find one. You can also look on the Moneyfacts website for deals.

If your current deal is coming to an end

Look around now to book in a new deal. Mark Harris, chief executive of mortgage broker SPF Private Clients, says it is possible to secure a new deal six months before your current mortgage ends.

“You don’t have to move onto it until your deal ends and, if rates have risen further in the meantime, you will be glad you reserved a deal in advance,” he says.

If you aren’t happy with your current deal

If you are midway through a mortgage deal, it’s unlikely there will be many better deals out there. Plus, you may need to pay a hefty exit fee to remortgage. But a mortgage broker will be able to identify whether your circumstances mean that you’d be better off breaking your agreement and finding something new.

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Drop your debts

Interest rates may rise on any credit card debts or loans that you may have, while those who struggle with the cost of living might find themselves taking on new debts. As well as keeping on top of your spending, you could consider:

A balance transfer credit card

If you have a good credit rating, these cards allow you to shift the debt onto a low or no interest rate card while you work on clearing it. You will usually pay a percentage of the debt you shift to do this, and it is important to have a plan to pay off the debt you owe over the interest-free timeframe before the card rate rises.

A bank account with a cheap overdraft

This Which? article gives a list of some of the best current accounts to switch to if you’re constantly going into the red.

Getting specialist help

Charities such as Stepchange, Turn2us and Citizens Advice can all help you with managing your debts. You could also apply for a Breathing Space, a debt respite scheme, to give you time to get on top of things.

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