What Does a Rising Interest Rate Mean for Your Investments?

On 15 December 2022, The Bank of England raised their base interest rate by 0.5 percent to 3.5%, the highest in 14 years. Their interest rates influence many other banks in the UK, including those you might have for a loan, mortgage, or savings account. This increase has been executed because inflation is too high, and so this measure is taken in an attempt to bring it back down. As a result, many people will face higher borrowing costs, while businesses could face higher loan rates.

What is an interest rate?

If you are a borrower, the interest rate is the fee you are charged for borrowing.
If you are a saver, the interest rate is your reward for saving.

What is a base rate?

A base rate is the interest rate that a central bank – such as the Bank of England or Federal Reserve – will charge commercial banks for loans. This will be different from the rate a high street consumer will see.

What Investments Are Affected by An Interest Rate Change

This is where our industry specialists can give you a helping hand. Handsford Bell are independent financial advisors based in Tavistock who can help you manage and plan your finances.

We are able to provide the expertise that lets you know what is possible for you and your finances without overcomplicating things. Data and statistics are already difficult to navigate around, so having a friendly advisor to map out your course to financial fulfilment while facilitating the changes you need to reach that goal will change the game in an affordable manner.

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What is the relationship between the interest rate and an investment?

Well, simply put, it is an inverse relationship. This means that when interest rates rise, bond prices fall, and vice versa. When an interest rate increases, it becomes more expensive to borrow money and more effective to save money.

The impact of the rise will vary depending on what investments you have.

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What is impacted by the interest rate?

Higher interest rates make borrowing money more expensive in the long run, reduces disposable income and therefore limits the growth in consumer spending, as explained below.

How are Mortgages affected by the interest rates?

If you are on a fixed rate payment, you can rest assured knowing your payment will not go up until the end of your fixed period. However, if your investment charges you a variable interest rate, you might find the cost of your monthly repayments go up.

Using a mortgage calculator to work out how your monthly payments might be affected can be helpful, but there can be miscalculations and confusion when it boils down to it.

If you are unable to keep up mortgage repayments, then your home may be repossessed.

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How are Loans affected by interest rates?

Like mortgages, loans become more expensive with an increase in interest rates.

While loans typically are given with the intention of repayment occurring over a shorter period of time and tend to have higher interest rate. As a result of this you might have to take into account the extra monthly income needed to borrow money. This is potentially unrealistic and unaffordable.

How are Shares affected by interest rates?

Initially, share price goes down because businesses must incur more costs. But don’t panic, it is important to consider that while the share price might go down, it doesn’t necessarily affect your dividend long term.

How are Savings affected by interest rates?

Money held in savings accounts hasn’t grown much in previous years due to historically low interest rates. But with inflation now running high, your savings are at risk of losing value in ‘real’ terms as you’ll be able to buy less with your money. While the Bank of England’s attempt to bring inflation back down to a target of 2% may have a positive effect on your savings – as higher rates tend to filter through the economy – it also means that balancing the juggling act between saving and the cost of borrowing will become very delicate.

How are bonds affected by interest rates?

Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond. Conversely, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, resulting in a decline in its price.

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The Benefits of Having a Diverse Investment Portfolio

Diversification has several benefits for you as an investor, but one of the largest is that it can actually improve your potential returns and stabilize your results.
By owning multiple assets that perform differently, you reduce the overall risk of your portfolio, so that no single investment can hurt you too much. A diversified portfolio may lead to better opportunities, enjoyment in researching new assets, and higher risk-adjusted returns.

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Financial Life Planning with Hansford Bell

Our financial planners deal with finances in a different way. Instead of focusing only on the money, our approach takes your life goals as the starting point. From here, we incorporate years of experience in the financial sector with cutting-edge technology to create a plan that delivers your chosen lifestyle. We won’t rest until we’ve figured out a way to align your finances with your hopes and dreams. We’re holistic, integrated, interested in you. In simple terms, we put the person first, not the data.

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If you’re interested in reaching out to begin your journey to a more simple, manageable and better-looking bank account, get in touch with one of our advisors today!

If you are unable to keep up mortgage repayments, then your home may be repossessed.

Next read: Tips for Setting and Achieving Your Financial Goals.

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