The government has now unwound most of its COVID19-specific support and relief measures. There is, however, one unofficial support measure still remaining. That is the 0.1% interest rate set by the Bank of England way back at the start of the pandemic. This too is expected to be rolled back shortly with further increases possibly to come.
Inflation is a pressing problem
Right now, inflation is running at about 3%. The Bank of England’s target is 2%, with a 1% margin of error in both directions. Over the course of the pandemic, this target was largely ignored. In simple terms, there was really no point in trying to apply normal controls to a completely abnormal situation.
Now the UK is returning to some form of normality (even if it is a “new normal”), the Bank of England is going to have to start returning to “business as usual” with regard to its role in managing inflation.
This does not necessarily mean that it’s going to start implementing major hikes in short order. The Bank of England is likely to be well aware that interest-rate hikes will hurt the UK’s many borrowers, especially those on low incomes.
A more likely outcome is that the Bank of England will do the absolute minimum necessary to keep inflation within the boundaries of its margin of error, if only just. It may even allow inflation to go slightly outside these boundaries as long as it is only just outside and there appears to be no danger of it getting out of control.
Mortgage holders may be best to fix
Fixing your interest rate now may not actually cut the overall amount you pay back on your mortgage. In fact, you could end up paying more than if you stuck it out with a variable-rate mortgage. It does, however, let you know exactly how much to budget for your mortgage each month. It also eliminates the stress of wondering just how high-interest rates could go.
Going for a longer-term fix, such as three to five years would give you security while you (continue to) build up equity in your home. Hopefully, by the end of that time, the UK should be very much over COVID19 (and Brexit) and genuinely back into business-as-usual mode. Even if it isn’t, you should have built up more equity in your home and hence be in a better position when you come to remortgage.
If you’re really struggling, then you might want to consider switching to an interest-only mortgage. This would, however, usually only be a stop-gap measure. You would need either to find a way to improve your finances and return to an interest-only mortgage or sell your home and rent until you were able to reenter the property market.
People with other debt also need to prepare
If your credit record is good, you may still be able to shift debt onto a 0% balance-transfer card. You could then continue your repayments at their current level but have more of them go towards repaying the principle rather than paying interest.
If this is not possible, then you could try consolidating your debt into a personal loan with more manageable repayments. As with fixed-rate mortgages, this would not necessarily reduce the amount you owe. It would simply give you more breathing space over the short term. You could then review as the UK really does return to economic normality.
Your last option is to grit your teeth and start increasing the repayments you make on your debts even if this is painful in the short term. Paying just a few pounds extra each month may seem pointless but actually, it really isn’t. Over time, these extra payments will add up and could potentially save you a lot of money.
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