Interest rates are going up, but what does that mean?

In June the Bank of England confirmed that the interest rate (also known as bank rate or base rate) was being raised by 0.5% to 5%. The rationale for this was because inflation is so high. But what does this mean and how does it have an impact on existing financial commitments?

In simple terms when the Bank of England increases the base rate, the knock-on effect is that lending rates will also increase. Whether that is a mortgage, loan or some other form of commercial funding, the interest rates will rise. The only exception to this is if a fixed rate has been agreed, which will only change when the fixed duration comes to an end and by default the agreement switches to a variable rate.

For the business community it is important that companies can rely on funding to help fulfil their growth plans. However, when we are constantly fed poor publicity about the hugely negative impacts of interest rates rising, it can quite rightly cause business owners sleepless nights. Should this be the case though, does an interest rate rise really need to cause so much panic?

For example, if a business is looking for funding of £200K and it is taken over a 5-year period on a variable rate which started at 2.5% and raised to 5% what does that mean to the repayments?  The total repayment calculated at 2.5% is £226,600.22. The total repayment calculated at 5% is £256,671. So, even if after signing a new finance deal the interest rate is immediately doubled, the repayment is not. It is in fact only increased by the interest rate rise so a monthly fee would change from approx. £3,777 per month to £4,278 per month.

We feel that it is important to highlight this because some of the scare tactics being used are not factual and do not show the accurate figures. In essence our message is simple; try to be calm about rising interest rates, often the issues are not as great as what they might seem.

If you have any questions or concerns about business funding and the impact of interest rates, then our team would be happy to help. Please call us on 01993 706403 or e-mail enquiries@ngifinance.co.uk.