By David Fields


So, the Bank of England has once again raised interest rates by a quarter of a per cent, and now they stand at 5.25 per cent, which was necessary to quell inflation, apparently. The rationale is basically that if you make the cost of borrowing money greater, then it means that people will have less to spend, stopping the price of goods escalating too much. If you need a loan however, why not try UK Net Guide's Loan Search

Now that is all very well for the big-shots on the Bank of England's Monetary Policy Committee - the official body charged with making this decision. But what does it mean for the average person on the street, who needs to keep on top of his/her financial situation?

Essentially there are two big effects that the rates rise will have on your finances and cash-flow. The first is that it's likely to increase the cost of borrowing. Mortgage providers, for example, will typically increase the amount of interest they charge you in response to the rates rise, so your monthly repayments will increase and you'll have less disposable income to spend. This can obviously be a real pain, particularly if you're not sure how high interest rates are going to go.

The solution to this might be in getting a fixed-rate mortgage. Basically, these are mortgage deals that offer a specified rate of interest - say five per cent - which is guaranteed not to change, regardless of what the Bank of England decides to do. The alternative arrangement is to have a variable-rate mortgage, where the interest rate will tend to change with the Bank of England's rate changes. At the moment, those with fixed-rate mortgages might be laughing all the way to the bank because they won't have to be paying anymore in interest as a result of the rates increase.

However, this doesn't necessarily mean that a fixed-rate mortgage is always the best option. For a start, interest rates can go down as well as up. The Bank of England could, in the future, decide to cut rates. This could leave fix-rate borrowers paying more than they would have if they had gone with a mortgage that tracks the Bank's base rate. The second point is that the interest rates on offer for fixed-rate products will typically be higher than the variable rate ones, because they need to take into account possible rate increases in the future. Remember that you're likely to hold a mortgage for a matter of decades, and a lot can happen in that time.

The second big effect on you is that, just as the interest you have to pay on borrowed money increases, so too will the interest you earn on saved money. So savings accounts can expect to deliver better returns following the rates increase. In a sense, the point of the rise is to encourage people to spend less and save more, so perhaps the wise thing to do is to follow that, and make the most of the interest rate as save up.