How to shield your wealth from rocketing interest rates

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The Bank of England is expected to announced an increase in the Bank Rate today, taking the rate to 1.25pc or even 1.5pc., as it combats runaway inflation. 

© Provided by The Telegraph Various people on towers of money (illustration)

How should households protect themselves from the central bank’s repeated rate rises? There are ways savers can profit by switching to the best savings rates, investing in companies that can prosper as the cost of borrowing rises, and locking in cheap mortgage rates while they last.

An interest rate rise should be a prompt to review your finances, here’s what savers, investors and homeowners need to do now.

Switch to the best savings deals

Those with traditional savings accounts have suffered from prolonged low rates and most will have seen their wealth diminished by inflation over the past year.

However, savers can limit some of the damage caused by the rising cost of living by moving their cash around. Most high street banks offer rates as low as 0.01pc on easy-access deals, but the average easy access rate across all banks is 0.46pc, according to analyst Moneyfacts. Banks have failed to meaningfully pass on increases in the Bank Rate.

Fixed-rate savings accounts do not let savers make early withdrawals, so money stuck in an account with a low rate will not be accessible until the term ends. Given rates are expected to rise further, locking your money away at today’s rates may not be the best strategy.

Cash Isas are usually more flexible. While their rates are slightly lower than those from bonds, they normally allow early withdrawals, with a penalty. These penalties differ by provider but can typically be 90 days’ interest for a one-year deal. Longer deals usually carry larger penalties.

James Blower, of Savings Guru, a consultancy, said: “Theoretically you could make money by moving to a cash Isa deal with a better rate.” However, the rate offered by the better Isa in future would need to be sufficiently higher to offset the impact of the early withdrawal penalty. 

Invest in companies which stand to profit

Rates would have to rise significantly over the next year to match inflation, meaning that risking money on the stock market offers the best chance of keeping pace with rising prices.

Firms with strong pricing power and high profit margins, such as luxury goods or software brands that provide essential tools, will not be too badly affected by rising prices, experts said. Fundsmith Equity, the £24bn flagship strategy managed by star manager Terry Smith, has large positions include Microsoft and L’Oréal, the luxury cosmetics company.

Another popular fund is the £1.4bn Morgan Stanley Global Brands fund, which buys companies with loyal customers that will be willing to pay more for goods and services.

Some shares can even thrive as interest rates rise. British banks will be clear beneficiaries, according to David Henry, of wealth manager Quilter Cheviot. 

“Higher interest rates mean that banks’ profit margins will improve,” he said. “The difference between what banks are able to earn from loans and what they pay on products like savings accounts increases as interest rates rise.” 

Mr Henry said Barclays was his pick of the banks listed on London’s stock market. “Its valuation is not particularly demanding,” he said, pointing to a modest price-to-earnings multiple of four. The ratio measures how much a company’s shares cost relative to its profits. 

“Its investment bank has been performing well too, which gives it an edge that many other British retail banks do not have,” he added. 

Will Walker-Arnott of the wealth manager Charles Stanley preferred Lloyds, due to its status as Britain’s biggest mortgage lender. “Higher interest rates will feed straight into its bottom line, assuming it chooses to pass on the costs to its mortgage customers,” he said.

Susannah Streeter, of broker Hargreaves Lansdown, agreed. “For a bank like Lloyds, which earns the majority of its income from traditional lending activities, a period of steadily rising interest rates has the potential to provide a significant boost,” she said.

Ms Streeter said investors should also consider buying shares in companies with high levels of cash on their balance sheets as they would be insulated from a rise in borrowing costs. 

Technology infrastructure business Softcat is one cash rich company. It ended its 2021 financial year with a net cash position of £102m. The stock is held by star manager Keith Ashworth-Lord, who runs the £1.3bn UK Buffettology fund. 

Another is 4imprint, a £851m marketing group which specialises in promotional products and has $42m (£32m) worth in net cash. Analysts at Peel Hunt rated the stock as a “buy”. Malcolm Morgan, of the broker, said that its customer base was growing strongly, and while there was still some Covid uncertainty from inflation to supply chain constraints, the company’s long-term outlook remained positive thanks to increasing efficiency.

Remortgage to a low rate while they last

Lenders have passed on interest rate rises to mortgage borrowers quickly after each of the last rate rises. In recent months a stream of lenders have already pulled their cheapest deals and made their loans more expensive.

Millions of borrowers who are on a variable-rate mortgage are highly likely to see an increase in their monthly mortgage payments. Rates for these homeowners are not guaranteed, unlike fixed-rate deals.

The average two-year fixed rate has climbed from 2.25pc to 3.35pc since October last year, when banks began increasing prices. This is despite the Bank Rate only going from 0.1pc to 1pc since December.

Standard variable rates are typically the most expensive type of mortgage, and experts have predicted today’s increase will be quickly passed on to these customers. Those nearing the end of their deal have been urged to remortgage sooner rather than later. Experts have urged borrowers who have lapsed onto their lender’s standard variable rate to switch onto a fixed-rate deal as soon as possible.

Pay off debts if you can

Higher interest rates also mean that payments due on credit cards and loans will become more expensive. Savers with cash set aside should prioritise paying off high-interest debt before rates increase any further.

If you have outstanding debt on a credit card it is worth transferring to an interest-free deal, according to Annabelle Williams of Nutmeg, an investment firm. “It is possible to shift your balance to an interest-free rate that runs for around two years”, she said.

“That gives you loads of time to pay off the debt provided you make a plan and set up a direct debit to pay more than the minimum repayment amount each month.”

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