Martin Lewis has issued an alert to anyone with key providers like Lloyds, Nationwide Building Society, NatWest Group, Santander, Barclays and HSBC UK on action to take now. Many people are wondering what the best thing to do with their money is now that interest rates are on the rise.
This week, the governor of the Bank of England has said high energy prices will make it “harder” to maintain interest rates at their current levels and avoid an increase. Andrew Bailey indicated that the Bank could have to increase interest rates if energy prices “remain higher” amid pressure linked to the conflict in the Middle East.
Inflation and energy price cap rise
Inflation is widely predicted to keep rising over the coming months as higher energy costs continue to filter through, with households set to witness a roughly 4% rise in the energy price cap from next week.
The Bank has predicted that inflation will increase to around 3.7% in the fourth quarter of this year and 4.2% in the first quarter of 2027.
Martin Lewis’s simple rule
With that in mind, personal finance expert Mr Lewis said: “UK interest rates look like they’re going to rise this year. No surprise, lots of people asking me, should I be using any spare cash to save or should I be trying to overpay my mortgage?”
He explained he has a simple ‘rule’ to decide what to do: “There’s a simple rule of thumb here. If your mortgage rate is higher than the after-tax rate you can earn on savings, you’re generally better off overpaying the mortgage. If your savings rate is higher than you’re paying on your mortgage, you’re generally better to save. A couple of extra points.
“First of all, always make sure there aren’t any penalties for overpaying your mortgage. Most people can overpay 10% a year without a problem. And second, always keep an emergency fund. 3 to 6 months' worth of bills aside before you overpay the mortgage, because the fact that you’ve overpaid the mortgage, if something happened that you couldn’t pay it in future, it wouldn’t stop them putting you in arrears.
“It’s also worth noting if you’re coming up to a time when you’re going to remortgage, especially if you’re borrowing a high proportion of your house’s value, your LTV is high, that it’s worth remembering when you come to remortgaging If you’re borrowing less, you might be able to get a better mortgage deal. So, you might want those savings, if you are saving, accessible to reduce the mortgage at the time you remortgage. Lots more information on this, and I’ll be going into full detail about what is likely to happen to interest and mortgage rates over the next year in the podcast.”
Bank of England rate predictions
Economists have widely predicted that the central bank is likely to increase interest rates later this year in a bid to help bring inflation back down to the Bank’s 2% target level.
On Thursday, Clare Lombardelli, a deputy governor at the Bank, said during a speech in Warsaw that energy price pressure could drive rate-setters to tighten fiscal policy unless there is particular weakness in the economy.
She said: “The longer higher energy prices persist, the greater the risk that indirect effects build and that inflation expectations, wage bargaining and price-setting behaviour begin to adjust in response.
“On that basis, policy is increasingly likely to need to tighten if elevated energy prices persist, absent clear evidence of disinflation or weaker activity.”
