The cost of mortgages and loans could be about to rise if the Bank of England raises the base rate on Thursday - but the good news is there are ways to beat this.
The Bank wants to control runaway inflation, which is now 3.1 per cent and could hit four per cent by the end of the year.
The Office for Budget Responsibility said the Bank of England could hike base rate from the current 0.1 per cent to 0.75 per cent by the end of 2023.
But this is bad news for homeowners and borrowers, as the rate is factored into the cost of financial deals.
Mortgage rates are already going up, as banks pre-empt a rise in base rate. Homeowners could see their mortgage payments shoot up by £510 a year if interest rates surge to their highest levels since the financial crisis.
Here is how to minimise how a base rate rise affects your money.
1) Fix a mortgage now if you can
If you have a variable-rate mortgage, this will rise as soon as the Bank of England changes base rate. Around a fifth of homeowners have one of these loans.
Everyone else is on a fixed-rate loan, where interest levels are set for the duration of the mortgage - normally two or five years.
But new fixed rate loans will go up, normally in line with base rate.
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For someone with a £250,000 mortgage, a 0.15 per cent rise in their mortgage rate will add £228 a year, while a base rate rise to 0.5 per cent will cost them £612 a year more.
So if your fixed-rate mortgage term is ending, or you have fallen onto a lender's standard variable rate after your fixed rate loan ended, it is a good idea to look for a new mortgage now.
Most lenders will let you set up a new fixed rate loan up to six months before your current one ends.
Being proactive about doing this, rather than doing it after a base rate rise, means your monthly payments will be less.
Laura Suter, head of personal finance at AJ Bell, said: “As we face a cost of living squeeze, with inflation set to go higher and taxes increasing from next year, many households can ill afford any increase in their costs.
"But by taking action now ahead of any rate rise, people can cut their costs and ensure they don’t end up being pinched.”
2) Get to grips with debt
If you are in debt, a base rate rise means higher costs.
This is because banks will pass on the rise in the form of higher interest on loans.
Suter said: "Many families are in more debt following the pandemic, so seeing any increase in those costs will be very tough, particularly as we’re currently facing a cost of living squeeze and higher taxes.
“The cost of debt has already risen in anticipation of a rate rise, with average overdrafts interest rates being 20.74 per cent while personal loan interest rates also rose in September to 6.02 per cent - the highest since pre-pandemic times."
The best thing to do if work out if you can switch any of your debt to cheaper borrowing, such as a 0 per cent balance transfer credit card.
These let you pay off your existing debts to the new card provider, but crucially are interest-free for a set time.
This means you have breathing space and your credit card repayments actually reduce what you owe, rather than pay off interest on the debt.
Another option is to check with your bank if you are eligible for an interest-free overdraft.
Suter added: "After that, people should list out their debt from the most expensive to the cheapest, regardless of the amount owed on each one, and prioritise paying off the most expensive before moving down the list.”
3) Get ready to shop around for savings deals
A silver lining of base rate rising is that the interest paid on savings deals will rise too.
This hit record lows during the pandemic, as base rate was slashed to 0.1 per cent last March.
When base rate rises, savings rates will too - though banks tend to pass on cuts much faster than rises.
Spare cash put into a savings accounts paying the best available rate means your money is growing as fast as it can.
That is important when the cost of many things - from groceries to energy bills - are rising.
Why do interest rates go up?
Central banks, like the Bank of England, have tools to help them shape the country's economy.
One of these is base rate, a kind of super interest rate which all other financial firms tend to pay attention to.
Raising or lowering this rate helps control the growth of the economy, and therefore inflation.
Inflation erodes the spending power of money, and the theory is that raising base rate brings this under control by making it more expensive to borrow.
How does raising base rate bring down inflation?
This is because when base rate is high, borrowing money is expensive. If a mortgage charges two per cent interest and base rate goes up by one per cent, the exact same mortgage will charge three per cent.
When this happens consumers and businesses are more likely to save and not spend, which slows the economy down and brings inflation down with it.
When base rate is low, borrowing is cheap - but savings rates are low, which means we are more likely to spend and not save. This means the economy grows quickly, but can mean inflation spikes.
