What does the UK's interest rate hike mean for savvy millennials?
As we all know, the Bank of England (BoE) decided to increase interest rates this week by 0.25%. The move in the base rate from 0.25% to 0.5% is the first rate hike since the 5th July 2007!! Say whaaaaaat! What does this mean for millennial money?
Here is your current backdrop:
- Your boss refuses to increase your wages in line with rising inflation
- Your budgets are already feeling squeezed
- Brexit is proving to be a bigger ballache that initially expected!
Here are 3 ways it can affect YOU today:
- Your mindset - Even though 0.25% is a teeny tiny increase, it creates a sense of panic. When we feel under attack, many of us retreat into our shells and decide to spend less and hoard our pennies. This is what we call a reduction in consumer confidence! The last thing businesses want is their millennial target market feeling spooked by rising rates. It poses the question, are rates going to increase again in the near-term? I wish I had a crystal ball to give you the answer, however, markets are pricing in another 2 rate hikes of 0.25% by 2020. Nonetheless, market expectations are often more flakey than that date which stood you up last month. For me, future rate hikes are likely to be gradual and in small increments. You won’t be waking up in 2018 with interest rates sitting at 3% (my famous last words…). According to Money Advice Service Trust, calls to National Debtline have increased by 10% this year. As higher interest rates settle in, so can financial anxiety. Click this link to get your dose of free advice so you can cure your financial migraine.
- The 45 million or so savers are set to benefit from this increase, however, isn’t it funny how banks will always raise mortgage rates immediately but take their time with savings rates!? Verrrrrrry interesting! Many lenders have already come out of the closet and said they will pass on the 0.25% rise to savers, however, don't expect hollywood returns. Nationwide said the “majority” of savers will see improvements in their interest rate, while Newcastle Building Society said it would pass on the rate in full. The losers from this hike are the 4 million or so households with variable rate mortgages. Why you say? Quite simply, their interest payments are linked to the base rate, and consequentially their monthly repayments are set to rise immediately. According to the Independent, a homeowner on a tracker mortgage paying 2% interest with a 25-year duration and a £250,000 repayment could see their monthly instalment of £1,100 rise by about £30. Around 57% of homeowners are currently on fixed-rate deals, so they are shielded from any interest rate rises until their term end. However, with soooo many millennials on short 2-year fixes, their next deal could be more expensive than they thought. If one doesn't remortgage at the end of their term, they will find themselves on their lender’s standard variable rate - this could leave you feeling bruised with many rates wayyy above the 4% mark.
- Does your holiday become cheaper? As we all know, the pound went downhill after the EU referendum. Volatility became our new best friend along with penny pinching exchange rates. An interest rate hike ‘typically’ means an increase in the pound, which means your beer in U.S became that little bit cheaper. Funny enough, the pound actually dropped against the dollar and the euro after the BoE's announcement on Thursday. Why you ask? Largely because much of the market had already priced in a hike and rates also are likely to rise slower than expected in the future. However, as far as currency swings go, who knows what's in store for GBP. The higher it climbs, the cheaper your stag/hen do can become!