Rising interest rates

Protect your finances and maintain your financial wellbeing.

6 min read

As interest rates begin to rise [1], there are a few things that you may want to consider which have the aim of keeping your personal finances in good standing. It is always important to remain on top of your finances, but especially during times of rising interest rates, as many people start to feel the squeeze.

Here are some really straight forward things to think about when looking to protect your finances and maintain your financial wellbeing against rising interest rates.

1. Mortgages

Tracker mortgages are likely be one of the first mortgage products to feel the effect of interest rate rises. If you are on a variable rate tracker mortgage, your monthly repayments could immediately increase. This is because the amount of interest you are charged on your mortgage borrowing varies, depending on the rate set by the Bank of England.

Mortgage rates have been creeping up for a few months and the expectation is they are likely to continue doing so[2], and as a result in the current climate you may find it difficult to find a better mortgage deal that you’re able to switch to. If you do need help with paying your mortgage, the FCA advises to speak to your mortgage lender in the first instance to discuss your options. There are also other organisations that may be able to help such as Citizens Advice, and also websites like the Government backed MoneyHelper (www.moneyhelper.org.uk) who also may be able to offer advice.

2. Credit cards

The rate of interest on your credit card may also increase with rising interest rates. If you have a good credit rating and have outstanding credit card debt, it may be appropriate to consider looking to move your debt to a cheaper rate or to a 0% deal.

0% balance transfer credit card deals are still currently available, as well as 0% purchase deals, meaning that you could cut the cost of your debt if you are paying high rates of interest. However, the best deals are usually only available to those applicants who have a strong credit rating, and those who have poorer scores may find themselves trapped on higher cost debt.

You should be aware that some forms of debt do carry penalties for early repayment, and it may not always be appropriate to repay a debt earlier than agreed. Make sure you understand if there are any penalties or early repayment charges, along with any other associated costs when deciding the most cost-effective approach to managing debt.

3. Review spending

Rising interest rates can also be a real problem and push up the cost of everyday items or services that previously you wouldn’t have thought twice about. Going through your spending with the finest tooth comb can help you find areas where you may want to cut back. Keep an eye on your budget and make adjustments as necessary to ensure that you are aware of your outgoing costs and can adapt your spending accordingly. Being able to see exactly where your money’s going will help you to pin down where you can make savings.

Ask yourself: What’s coming in and going out? Can I get something cheaper? And (often the hardest of all): Do I really need that? Look at the money you have coming into your home – whether that’s just you or with someone else. You want to look at all your expenditure that’s going out each month, there may be a lot more than you think!

4. Emergency savings

When it comes to financial security, one of the most important things you can do as we start to feel a squeeze on personal finances, is to keep emergency savings aside for when you may need them. Having a nest egg that you can tap into may help you weather a rising interest rates storm. One method is to create a dedicated savings account that you only use for this purpose. This way, you can easily access the funds when you need them, but they remain out of reach for everyday spending.

Aim to build up enough to cover between three to six months’ expenses, or as much as you can afford. The best thing to do is make room for your savings in your budget as one of your outgoings. By doing so, it’ll help you see your savings as a must, rather than a must-do-later. And if you can, set up an automated payment from your normal bank account straight into your savings account – that way you don’t even need to think about it.

Savers may be able to take advantage of increasing interest rates, and if you are able to put a little bit away each month, make sure you shop around for the best savings rates.

5. Pensions and investments

As many people across the country are feeling the squeeze of rising interest rates and increased cost of living expenses, it’s more important than ever to make sure your finances are in good shape. One way to do this is by making sure you don’t touch your pension or investments. While it may be tempting to dip into these savings to help make ends meet in the short term, it’s important to think about the long-term impact this could have on your retirement plans.

Drawing down on your pension or selling investments could leave you worse off in the long run, so it’s important to consider all of your options before making any decisions. Accessing your pension benefits early could impact on the level of your retirement income and your entitlement to certain means-tested benefits; it isn’t suitable for everyone, so ensure you do your research.

Consolidating your old pensions into one could help you cut down on management fees and give you a better picture of how your finances are looking. But before taking any action to switch pensions or investments, you should seek professional, regulated advice to ensure you fully understand all the implications.

Ask for help

If you do find yourself in difficulty and needing help with your finances, it’s better to ask for this help sooner rather than later. FCA research from January 2023 showed that the number of people struggling to meet bills and credit repayments has risen by 3.1m since May 2022, rising to 10.9m (compared to 7.8m in May 2022)[3].

In a recent press release[4], the FCA encouraged anyone struggling to keep up with payments to contact their lender for support. Consumers can also visit MoneyHelper for useful tips on living on a squeezed income and to find free, expert debt advice.

Some of the positive steps you could take include:

• Contacting your lender if you are struggling to meet your payment.
• Get in touch with Moneyhelper (www.moneyhelper.org.uk) They are a Government backed service that can help people with things such as budgeting, prioritising bills, and where to seek debt advice.

In addition to the steps above, some other helpful tips suggested by the FCA and Moneyhelper are:

• Talk about it; opening up to someone can be the first step in helping you regain control.
• Work out what you owe in total – this will help in the long run.
• Prioritise your debts – things like your mortgage, rent and utility bills should be the first ones you pay.
• Set yourself a realistic budget.

1 11th May 2023 | Why have interest rates gone up? | Bank of England
2 11th May 2023 | UK interest rate rise: how will it affect you? | The Guardian.com
3 17th May 2023 | Financial Lives January 2023: Consumer experience of the rising cost of living – the burden of bills and ways to get support | FCA
4 17th May 2023 | Help is available for those who need it, says FCA | FCA

Please note: This article is for general information only and does not constitute advice. The information is aimed at retail clients only.