As many of us know, interest rates aren’t very interesting at all. When you look at your bank account these days, the amount of interest you’re getting from cash savings (0.1%) seems very insignificant. The interest rate has fallen to the point where it’s so low that even if you had hundreds of thousands of pounds in the bank, it probably wouldn’t even be worth the bank administering the interest payment to you. The interest amounts are that small.
Interest rates affect many things
However, you may be surprised to learn that interest rates have a significant bearing on quite a lot of things, not just the standard bank accounts.
People don’t always realise that interest rates have an impact on many other aspects of life, like the amount you can borrow for a mortgage or to buy a car. This is all affected by the Bank of England base rate.
In my lifetime (and I’m 35) I still remember a time when you were being offered 5–10% interest on your personal bank account! Needless to say, those days are long gone which means that your standard savings account is far less efficient at making you money than it used to be.
And right now interest rates are the lowest they have ever been.
The UK government has been lowering interest rates steadily over the years to help stimulate growth in the economy. It helps with mortgage repayments, bank loans and encourages spending. So the UK government needs interest rates to be low, but not too low – the rates have to be just right.
Interest rates and inflation
We know this by looking at the current state of inflation. At present, inflation is rapidly going up (higher than figures might suggest) because the cost of everything is increasing. Events like Brexit and the rising price of oil are pushing inflation up; things are getting more expensive and now that we are coming out of lockdown there is a far bigger demand for products, plus a lack of stock, especially overseas stock All of these factors push inflation up, and interest rates tend to follow.
Are rising interest rates a good or a bad thing?
Rising interest rates can be a blessing and a curse at the same time. For the UK government, low interest rates can actually be a very good thing.
Much like the standard UK citizen paying off their mortgage, the government also has its own loans that it needs to pay off, along with the interest that comes with those loans.
So, as interest rates go up, that can threaten the economy because the government’s repayments become a lot bigger.
Along with that, the people with variable rate mortgages can be seriously affected by rising interest rates too. What if all of a sudden your £500,000 mortgage rose from 0.1% to 1, 2 or even 5%? That would be catastrophic for most people! Especially the ones who have stretched themselves to buy a property.
If you think that is bad, imagine paying 5% interest on a £100 billion government loan!
Who gets affected by rising interest rates?
Although it’s highly unlikely that we will ever get the 15% interest rates our parents and grandparents remember a rise from 0.1% to 1 or 2% can be very problematic for some people when you look at the prices of residential property today.
For most young couples buying homes today, the difference between their salaries and the price of their home is the highest it’s ever been; while interest rates have gone up and housing prices have climbed, wages have not risen in comparison.
Even with Boris Johnson’s move to temporarily remove stamp duty, people can’t afford half as much as they could a decade ago, and if interest rates rise, that becomes even more apparent.
Little changes make a big impact
Although they seem small and insignificant, interest rates make huge waves across billions of pounds of government repayments, and have a massive impact on debt across people’s mortgages too.
At the same time, these interest rates are providing no real return on cash savings, and this is what is pushing more and more people to independent financial advisers like Applewood Independent. People want to invest their spare cash into funds that will enable their money to work as hard for them as possible.
Negative interest rates
There has been a lot of talk in the news recently about negative interest rates, as if that is something to be very concerned about. However, that might not be the case.
In fact, negative interest rates might be a good thing.
Mortgages might become a bit cheaper for those who are looking to move to a new mortgage deal, which could make a big difference to some people.
You might not get as much interest on cash savings, and may even owe the bank a little bit, but for most people there is very little difference between earning 0.1% and paying 0.1%.
However, this 0.1% difference would certainly help the government repay the billions of pounds it has borrowed over the last couple of years.
It’s always worth paying attention to interest rates. They may seem small but they can have a huge impact on the world when they move up and down.
Banks aren’t providing efficient returns on cash savings
The all-time low interest rates we are seeing at the moment have driven more and more people to look to experienced independent financial advisers.
Around 15 years ago, people were far more reluctant to hand over their money to a financial adviser because they were getting a fairly healthy 7–10% interest rate from the bank.
However, that is no longer the case, and with interest rates as low as they are now, many people’s cash savings are pulling in next to nothing in terms of providing them with an income they can retire on.
This means that they need to find other ways to make their money work for them, and so they come to us for help.
Even though investments can still be affected by interest rates, you are potentially going to be better off having that money invested with an independent financial adviser who understands the market, than having it sat doing nothing in the bank.
I hope this has been useful, and if you have anything else to add, I’d love to hear from you. To find out more, feel free to get in touch by emailing alex@applewoodindependent.co.uk.
The views expressed in this article are those of the author and do not constitute financial advice. Applewood Independent Ltd is authorised and regulated by the Financial Conduct Authority. For financial advice designed for you and your specific circumstances, please contact the author using the contact details provided in this article or, alternatively, contact the Applewood Independent Ltd office on 01270 626555.
The value of your investment can go down as well as up, and you may not get back the full amount invested.
Past performance is not a guide to future performance.
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