Start planning for interest rate rises NOW

The Governor of the Bank of England, Mark Carney, could not have been clearer – interest rates will be going up, and sooner rather than later.

You don’t need to understand anything about economics to get the picture: those of us with mortgages on variable interest rates will soon be paying more every month. 

And those of us looking to rent will find that rents are likely to start creeping up too, as higher mortgage costs filter down from private landlords.

And it’s not just mortgages.  Some credit cards are now linked to the Bank of England base rate – so that a rise in the base rate of, say, 0.25% will trigger the same rise in interest charged on those credit cards.

 There’s a reason these warnings of interest rate rises have been trickling out over the past weeks – and the clue is in the word “warning”.  The Bank of England wants us all to get used to the idea before they actually hit.

So now is the moment to look seriously at your budget and start planning for the inevitable.

Your mortgage or rent payments are the single most important in your budget.  They head the list of priority payments, which also includes council tax, water, gas and electricity, transport to work and school, food and essential clothing, insurances, pension contributions, childcare and child support, maintenance payments, main house phone, court fines, TV licence, prescriptions and HP payments for household essentials like your car, fridge or washing machine.

That list is long, but it covers what is essential to keep family life going. Only once you have set aside enough money to cover these essential bills should you factor in unsecured loans such as outstanding credit card balances and personal loans. 

Before you start thinking about how to prune back living costs to cover that likely mortgage or rent rise, have a look at your list of direct debits and standing orders.  Firstly, do you know what they all are?  Make sure you don’t have any club or magazine subscriptions that you don’t use, or are paying monthly for an app which has never been as useful as you thought.  And check all the service plans for household equipment – you’d be surprised how often people forget to cancel an annual payment for a washing machine repair policy when they buy a new machine...

One simple way to keep track of the essentials is to open a Basic Bank Account which you use just for paying the priority bills.  Arrange for enough money to be transferred in at the beginning of the month from your main account to cover your priority payments and either move across or set up direct debits and standing orders for all those main bills. 

You’ll then be able to see each month exactly how much you have left for all the non-essentials.

Once you get to this point, then you can start following money saving advice from sites like the Money Advice Service or MoneySavingExpert, which will help you make sure you are getting the best value for money.

These aren’t quick jobs, it’s true.  But better to get your finances in the best possible order before mortgage rates go up, rather than waiting until the first increased payment tips you into unmanageable debt.

For more on the interest rate story, click here