You may well have seen rising interest rates in the news over the past few weeks, as the Bank of England (BoE) confirmed on 16 June that it had increased its base rate to 1.25%.
Representing the fifth increase since December 2021, the base rate can have a marked impact on your finances, from your savings and investments to any mortgages you have.
So, find out why the BoE has increased the base rate, and what it might mean for your finances as a professional rugby player.
The BoE can use the base rate to control the rate of inflation
To understand how rising interest rates could affect you, it may first be useful to know how they change, and why.
As the central bank in the UK, the BoE sets a base rate that determines rates of interest and lending across the entire economy.
This directly affects the rates that other financial institutions, such as banks and building societies, receive when they save with or loan money from the BoE. In turn, these institutions then use the base rate to determine their own rates on everything from savings accounts to mortgages.
One of the reasons the base rate is so significant is because it is also one of the tools the BoE can use to try and control inflation.
Inflation has also been headline news over the past few weeks as the cost of living in the UK has grown considerably.
Indeed, according to the Office for National Statistics (ONS), inflation reached 9.4% in the 12 months up to June 2022.
In response to inflation, the BoE can:
- Decrease the base rate in an attempt to discourage banks and individuals from saving their money, while also incentivising banks to lend and individuals to spend to stimulate the economy
- Increase the base rate to have the opposite effect, encouraging banks and individuals to save rather than spend, with the aim of reducing the rate of inflation.
Generally, the BoE targets annual inflation of just 2%. With inflation vastly exceeding this limit, you can see why the base rate has now increased.
How the base rate increase could affect your savings, investments, and mortgages
So, what does this all mean for you and your money? Here is how an increasing base rate could affect your savings, investments, and mortgages.
1. Savings accounts may receive higher rates of interest
The first area that may be worth keeping an eye on is your savings. A rising base rate normally means that savings interest rates also increase.
However, these rates will still likely lag far behind the rate of inflation. Indeed, according to Moneyfacts, the highest available interest rate on an easy-access savings account was just 1.4%, as of 4 July 2022.
If you had put £10,000 in this savings account a year ago, you would now have £10,140. Meanwhile, a year of inflation at 9.4% would see £10,000 of goods and services cost £10,940 now.
That means, even though your saved money has generated interest, it also has less spending power in the wider economy. This essentially means your money has lost value in real terms.
This may be all the more important to you depending on where you are in your current playing contract. For example, if you still have another year before a contract review, that means your wages are going to be fixed for another 12 months while inflation may continue climbing.
As a result, you may want to think about holding less of your money in savings to prevent it from losing its real value like this, even if you see an increase to the interest rate you are receiving.
2. Investments may be affected, although research suggests this is not the case
One of the most common methods to avoid the eroding effect inflation can have is to invest your money in a range of assets in the stock market instead. So, it is worth noting how rising interest rates might affect investments, too.
The common perception of investments and rising interest rates is that, as customers look to tighten their belts, the resultant decline in spending would see company performance dip. In turn, you might expect share prices to fall, too.
Yet interestingly, according to research published in Professional Adviser, US equity markets have historically still remained positive during months when interest rates are increased.
Of course, just because something happened in the past does not mean it will happen again in the future.
Investments are often a crucial part of a financial plan for many rugby players, ensuring that the money you earn from playing keeps its value and continues to support you for the future.
That is why, regardless of what happens, it can be worth working with an expert so you can be confident that your investments will allow you to live the lifestyle you want.
3. You may have to pay more for any mortgages you have
The other key area that you may want to keep an eye on is any mortgages you currently have.
Fixed-rate mortgages will not be affected by an increase to the base rate in the short term, as the interest rate paid will stay the same until the end of the fixed-rate period.
However, when that period ends, you may be moved onto the standard variable rate (SVR) offered by your lender.
Many lenders base their SVRs on the base rate, meaning you may see an increase in your rate and monthly repayments if your fixed rate ends and you do not move to another mortgage.
So, if you are approaching the end of a fixed-rate mortgage, you may want to consider arranging a remortgage for after your fixed-rate period ends so that you do not end up stuck on a SVR for a prolonged period of time.
Similarly, if you have a variable-rate mortgage, your interest rate will also be determined by the SVR, again meaning you may face higher repayments with the base rate increase.
Meanwhile, you will likely see an increase to your payments if you have a tracker-rate mortgage. Most tracker-rate mortgages are directly linked to the base rate so, when it rises, your repayments rise accordingly.
Whether you have a fixed-, variable-, or tracker-rate mortgage, remember to check yours and plan accordingly if your interest rate is set to increase.
The same is true of any buy-to-let (BTL) properties you purchased with a mortgage, as these may also be affected.
Work with a professional
Want to find out more about how to manage your finances as interest rates rise? Get in touch with us at DBL Asset Management.
Whether you have just signed your first professional contract, or you are thinking about life beyond the game, we help rugby players to make the most of the money they earn.
Email firstname.lastname@example.org or call 01625 529 499 today to find out how we could help you.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Buy-to-let (pure) and commercial mortgages are not regulated by the FCA.
Think carefully before securing other debts against your home.