Katherine Hill, Specialist Financial Adviser (from Wesleyan Financial Services), shares insights on the ongoing inflation crisis and what you might want to do in response…
This increased interest rate from Bank of England marks the first rise in more than three years. The Bank’s Monetary Policy Committee voted 8-1 in favour of the increase in the Bank rate.
The move comes as the result of growing concern over inflation as the Consumer Price Index reached a staggering 5.1% in November, with driving factors including soaring energy costs. This is expected to reach 6% by spring - three times the Bank of England’s official target and a level not seen since the early 1990s.
The real question will be, how will this impact your money – both personally and from the perspective as a practice owner?
Here are the key considerations:
Impact for home and commercial property owners
While it’s not necessarily good news for new lending, the higher interest rate will not immediately impact the majority of existing mortgage borrowers when taking into account UK Finance data – which shows that around 74% of mortgages are at a fixed rate.
Approximately 850,000 mortgage borrowers currently have a tracker rate mortgage and will see an average increase in repayments by £15.45 per month. For the approximate 1.1 million mortgage borrowers on a standard variable rate, the rise translates to an estimated increase of £9.58 per month on average.
While an increase on household costs is unwelcome, the figures suggest that the impact is unlikely to make much difference to household budgets.
The era of extraordinarily low mortgage rates appears to be coming to an end, although the expectation is that the rise in rates will be gradual. Prospective buyers will need to factor this into their plans.
For principals, it’s good to be aware that over-borrowing in a financial climate of increasing interest rates may impact your overheads and profitability. This in turn could impact the value of your business.
Impact for savers
For dentists, there is a twofold consideration – how it will impact personal savings and, for principals, business savings accrued from their dental practices.
The base rate change may take time to be applied to variable interest accounts, and there is no guarantee the 0.15% rate increase will be passed on in full, or at all.
The rise in interest rate doesn’t really help cash savers. Even with the market leading 5 year cash savings fix at 2.1%, there’s a 3% gap for cash savings to hold their value versus inflation. If the base rate is passed on to savers, the 0.15% base rate won’t make much of a dent in the context of inflation at 5.1%.
Savers should look to protect their long-term purchasing power from inflation - moving some savings into investments can provide a way to grow wealth by helping to beat low interest rates, outperform inflation and build new income streams.
If in doubt, speak to a specialist
When weighing up the pros and cons of saving vs investing, an expert can help you create a plan to make the most of your finances.
If you’re novice to investing, from setting your financial goals to calculating your potential returns, there’s a lot to consider with an investment portfolio.
If you’d like further advice in this area, you can speak to a Specialist Financial Adviser from Wesleyan Financial Services as part of a no obligation financial review.
Remember, the value of investments and any income can go down as well as up and you may get back less than you invest. Capital at risk.