What are interest rates and how do they affect me?

Quite simply an interest rate tells you how high the rewards or gain can be from savings (so higher interest rates are good) but it also tells you how much the cost of borrowing is (which is not so good if you have a mortgage or loans).

Evan a relatively small amount can have a big impact on an individual or indeed a business.

As a basic example on how interest rates affect a repayment mortgage – on a £200,000 mortgage over 25 years if you have an interest rate of 2.5% the repayments are £897 per month and total payments of around £270,000. If that rate were to be 5% then repayments would be £1,170 per month and total payments of £350,000. Over the 25 years that is around about an £80,000 difference.

As a basic example on how interest rates affect savings – for arguments sake lets use the same figures so someone has £200,000 in savings (lucky them!) and over 25 years they have an interest rate of 2.5% then after 25 years the total value of the savings would be £373,000 or if the rate was 5% it would be a staggering £696,000. This is thanks to a thing called compound interest.

In the real world, millions of people have mortgages of £200,000 plus but very few have the luxury of having £200,000 in savings but I wanted to highlight the negatives around rates rising for borrowing but also show how over time savings can also benefit greatly from increased rates.