How to make the most of high interest rates

Soaring interest rates are bad news for borrowers but there may be silver linings for some people. 

The Bank of England’s Monetary Policy Committee this week raised its interest rate for the 13th month in a row, from 4.5% to 5%. The hike took the base rate to a 15-year high, and was a “bigger increase than most forecasters expected”, said the BBC.

And financial markets are predicting that the rate could hit 6% by early 2024, reported FXStreet, as the Bank’s “firefighting mission” to tackle high inflation levels continues.

Higher interest rates are likely to impact financial products ranging from mortgages and other loans to pensions and savings. Here are some strategies to avoid paying over the odds – and potentially profit.

Search for better savings accounts 

Banks traditionally used the base rate to price their savings products so “in theory” a rate rise should lead to higher interest on savings accounts, said The Times Money Mentor.

But the personal finance website highlights that many banks have been slow to pass on the previous 12 base rate rises to savers and average savings rates remain below the inflation rate of 8.7%, “meaning that your money is losing value in real terms”. 

Rachel Springall, finance expert for Moneyfacts, said savings rates have been improving and savers should still make every effort to secure a better deal and “act with pace to take advantage of a top rate”. For example, the best easy access rate two years ago was at 0.5% from Atom Bank but savers can now earn 4.01% from Principality Building Society. 

Pay off expensive debts

The bank rate also influences the interest banks charge on debt such as credit cards, loans and overdrafts. 

This shouldn’t affect those on a current fixed-rate loan but it could make new finance more expensive and the rates on your credit card and overdraft could also go up instantly if you fail to clear them. 

The average annual interest rate in April was “21.86% on bank overdrafts and 20.13% on credit cards”, even before the latest interest rate decision, said the BBC, so there is nothing stopping overdraft and credit card charges going even higher. 

Savers should prioritise paying off high-interest debt “before rates increase any further”, said The Telegraph

Annabelle Williams, of Nutmeg, suggested to the newspaper that it may be worth shifting debts to an interest-free balance transfer credit card, with some running for two years. 

This lets people with credit card or overdraft debts move their balance to a new provider and focus on making interest-free repayments over a set period. Williams said this provides “loads of time” to pay off a debt as long as you set up a direct debit to clear more than the minimum repayment each month. 

Invest rather than save 

If you have spare cash and don’t have high debts to repay, investing may get a better return than saving, plus your cash “stands a better chance of keeping up with inflation”, said MoneyWeek

Investing returns aren’t guaranteed but the Barclays Equity Gilt Study shows UK shares have beaten cash in 90% of five-year periods since 1899. So consider investing over saving if you are happy to take some risk with your money and “aim for at least five years if you can”, explained MoneyWeek. 

Consider locking in a new mortgage rate

While interest rate rises have been filtering through slowly to savers, they are passed on quickly to mortgage borrowers. 

The average two-year fix surpassed 6% this month, the first time since December 2022, according to Moneyfacts

Current mortgage borrowers coming towards the end of a fixed-rate deal or those on standard variable rates – “the most expensive type of mortgage”, said The Telegraph – should look to switch “sooner rather than later”. 

A new mortgage deal can often be secured six months in advance, plus you may be able to switch it if rates have fallen, added The Times Money Mentor. 

If you still have a while until your fixed-rate mortgage expires, it may be worth “taking advantage of the low rate you’re currently enjoying”, said MoneyHelper, and pay extra through overpayments. 

Look into an annuity

Another group benefiting from rising rates is retirees. Rising interest rates are improving the rate paid on annuities – a retirement product that pays a fixed income for life using your defined contribution pension savings.  

Annuity sales have reached their highest level since 2014, up 22% during the first three months of 2023, according to the Association of British Insurers

Annuity providers back their products using government bonds, known as gilts. As interest rates go up, so do gilt yields, explained Which?. While your pension size, age and the economic environment are taken into account, a rise in interest rates “should push up annuity rates as a result”.

That doesn’t help if you already have an annuity as you can’t switch, but you can still hopefully “benefit from better interest rates”, explained MoneyHelper, “by putting the money from the annuity into a savings account”. 


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