Bank of EnglandNov 2 2017

What does today's rate rise mean for you?

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What does today's rate rise mean for you?

Today, after years of flirting, Mark Carney has finally committed and gone through with the rate rise he was teasing us with for months.

The Bank of England's monetary policy committee has voted to increase the Base Rate from 0.25 per cent to 0.5 per cent.

But how will this affect your clients and what, if anything, should be done about it?

1) Variable rate mortgages

These are the 3.9m people at the sharp end of today's announcement since, as their are on variable rate mortgages, their monthly payments will be going up.

However it is worth remember that, according to analysis by Moneyfacts, the average standard variable rate has fallen from 7.41 per cent in July 2007 - the last time we saw a rate rise - to 4.6 per cent today.

Based on this average, today's rate rise represents an increase of £28.72 to monthly repayments.

But all is not lost for these people.

Charlotte Nelson, finance expert at Moneyfacts, said: "Lenders have been keen to attract the attention of borrowers to protect their mortgage book in case of a rate rise, which is one of the main reasons both the cost and availability of deals has improved.

"The number of mortgage deals has increased to 4,748 from 4,151 in just one year.

"With fixed rate mortgages still low, borrowers will be significantly better off switching deals now before it may be too late."

According to UK Finance, those on SVRs have higher rates but typically a lower debt, at £91,000 compared to £141,000 for those on fixed rates.

The 1.4m borrowers on tracker rate deals have higher average balances, at £131,000, than those on SVRs, but their average interest rate is lower at 1.73 per cent.

2) Fixed rate mortgages

This is where we get into the seachange which has happened in the mortgage market since the financial crisis.

The vast majority of new borrowers are on fixed-rates: more than half of all outstanding regulated loans are currently fixed-rate, as is 80 per cent of all new lending.

In the immediate aftermath of the financial crisis more than 70 per cent of all mortgage debt was variable rate. This now sits at just 43 per cent, according to the Bank of England.

But borrowers have been acting on speculation about a Base Rate rise for some weeks, meaning that while these borrowers will be able to carry on as normal for now, they may find themselves moving onto higher rates when their term ends.

A 0.04 percentage point increase since 1 October has taken the average two-year fix to 2.24 per cent after 21 lenders upped their rates, according to data from Moneyfacts.

Skipton and Nationwide were among the first major lenders to raise their rates on 29 September, with Halifax following suit on 2 October with increases of up to 0.2 percentage points.

NatWest increased rates across its core residential range on 6 October, as well as reducing the amount of cashback on offer by up to £250.

Following the lenders’ moves, brokers told FTAdviser that intermediaries should consider encouraging clients to lock into a fixed rate deal if they had not already done so.

3) Defined benefit pensions

Those hoping to transfer out of a defined benefit pension scheme could find themselves getting less bang for their buck following today's rate rise.

This is because DB schemes calculate their liabilities using gilt yields, which are expected to be boosted by the Bank of England's rate rise.

Transfer values have already been falling as gilt yields have increased recently, with Xafinity recording a 4 per cent drop in September.

According to Xafinity's most recent figures, average transfer values now stand at around £230,000 for a pension worth £10,000 a year at age 65.

Nathan Long, senior pension analyst at Hargreaves Lansdown, pointed to the fact that data from the Pension Protection Fund showed that in September the aggregate funding position of DB schemes was 90.6 per cent, compared to only 79.8 per cent a year earlier.

He said: "The transfer value for those looking to transfer out of a final salary pension are determined by the cost of securing guaranteed income. As that cost reduces, ie gilt yields rise, we expect to see a corresponding reduction in the transfer values offered by this type of scheme."

4) Annuities

Annuity rates bottomed out in September last year and since then they have increased 16 per cent.

Back then a £100,000 pension would buy a 65-year-old £4,495 of secure annual income but now it would buy £5,209, according to Hargreaves Lansdown's analysis.

But the Bristol-based company warned that the last time interest rates rose, the impact on annuity rates was slight, with a 0.5 per cent increase in the following weeks.

Richard Eagling, head of pensions at Moneyfacts, warned that gilt yields have been rising for several weeks now without affecting annuity rates.

He said: "The interest rate rise is good news for those on the verge of retirement who may be looking to secure an income through an annuity, as it’s likely to boost gilt yields, which underpin annuity rates.

"Although gilt yields have started to increase in recent weeks, they remain low on a historic basis and the increases have yet to fully feed through to annuity rates.

"A significant boost in annuity rates is long overdue, with annuity income having fallen every year since 2014. It will be interesting to see whether any rise in annuity income encourages more retirees to consider the merits of an annuity rather than simply opting for drawdown."

5) Close to retirement?

Those close to retirement face another issue brought about by gilt yields, particularly if they find themselves in a "lifestyle" investment strategy which moves from equities to bonds as the saver approaches retirement.

Around £11bn is held in these funds on behalf of pension investors buy they have fallen by more than 4 per cent on average since early September as gilt yields have risen.

Mr Long said: "Imagine a pension pot of £100,000 - in little over a month the strategy that you understand to have de-risked you has actually lost over £4,000.

"This is why understanding where you are invested, particularly on the run in to retirement is so important."

He added that these plans used to be designed to smooth out any changes in the annuity market, so if annuity rates went down the fund value would go up to compensate. But since the pension reforms most people do not buy an annuity.

6) Drawdown

If your clients are already in drawdown and their pension is at the mercy of the markets, then experts are predicting little impact in the short-term - at least from rate rises.

Thomas McMahon, senior analyst at FE, said today's interest rate rise had already been priced in and it probably represents a "one and done" approach from the Bank of England.

Instead Mr McMahon said the longer-term picture was likely to remain clouded by the uncertainty surrounding Britain's departure from the European Union.

He said: "Investors panicking about bond allocations should consider what has happened in the US: there have been four rate hikes since December 2016 and in that time the US 10-year bond yield has risen by just six basis points.

"And this was in a hiking cycle driven by a strong economic recovery rather than the UK hike which is a reversal of a dubious emergency measure."

7) Savings

According to the Bank of England, cash savings in an easy access account will be earning 0.14 per cent while cash Isas will be earning 0.3 per cent.

Yorkshire Building Society and Nationwide have already said they would pass on the full rate rise to savers on variable rate accounts.

Mr Carney made clear today that he expects the rate rise to be passed on to savers, reminding banks they were quick to pass on the cut in interest rates and threatening to "watch it closely".

The good people at Savings Champion said it was "unlikely" the full rise would be extended to all variable rate accounts and even if it was passed on, it would take a while to filter through.

Ms Nelson said: "Given it’s been such a long time since the market has seen a base rate rise, it is very difficult to tell whether providers will increase their rates straight away or decide to wait and see what the rest of the market does before making their move.

"Anyone looking for a savings deal now will need to keep on their toes and check the Best Buys to ensure they are still getting the best rate."

damian.fantato@ft.com