TOP FIVE TIPS TO PREPARE FOR INTEREST RATE RISES

• Chris Williams, CEO of online advice service Wealth Horizon, offers his top five tips on how investors can prepare for future interest rate rises
Following the news that Bank of England Governor Mark Carney has indicated interest rates in the UK may start to climb off record lows at the turn of the year, Chris Williams, CEO of online advice service Wealth Horizon, offers tips to investors on how best to prepare for any hike.
Tip one: Review all aspects of your day-to-day finances. Take a ‘bottom-up’ approach to your budget. What will interest rate rises mean for your daily finances and what impact will this have on your ability to invest? Find out what you can realistically afford to put aside each month and make cut-backs where necessary in order to keep building your nest egg.
Tip two: Time to ditch fixed income? When interest rates rise, it is typically a signal of an improving economy, but many asset classes actually struggle in this environment. For example, fixed interest investments tend to struggle as cash starts to pay more interest. Now could be a good time to reassess your investment strategy and asset allocation to ensure your portfolio is well diversified.
Tip three: To fix or not to fix? With a rate rise looking more certain, a fixed rate mortgage will almost certainly be the preferred route for would -be or existing homeowners. However, it is still worth shopping around as rates vary significantly. Given any rate rise is likely to be minimal, tracker mortgages may still offer better value for some time to come.
Tip four: Consider currencies. Fluctuations in currency prices are closely linked to interest rate rises. This could be good news for sterling, which may gain momentum against other currencies because higher rates attract foreign investment. Indeed, following Mark Carney’s announcement last week, sterling hit a seven-and-a-half year high. Whilst this can be good for some investments, a soaring pound will impact earnings of equities and other investments so be mindful of the potential impact on your portfolio.
Tip five: Cash still won’t be king. For savers who remember the heady days of bank accounts paying five per cent interest, the prospect of a rate increase will come as a blessing. Yet, if you are looking to gain an income from your cash, it is important to remember that any interest rate rise will be marginal, and remains dependent on banks actually passing it on to savers. Therefore, you should consider investing your money rather than leaving it in cash.
Williams said: “Carney has for a long time outlined plans to keep rates low for a sustained period, but his announcement last week shocked markets when he revealed that interest rates might be hiked this year. For investors, now is the time to prepare for a changing landscape in which many of the strategies that have been adopted in the low interest rate environment need to be reviewed and reconsidered.”