With turbulent economic conditions placing additional pressures on the Government, it may come as little surprise that borrowing has been rising.
It can often be difficult to fully quantify what the impact of increased Government borrowing is on the average person, but looking at how interest rates and saving strategies are affected is a good place to start.
What impact will higher Government borrowing have on interest rates?
Government borrowing is connected to gilts, which are the bonds people can invest in to give the Government some extra spending power and receive a return on investment as a result.
The gilt yield recently rose to 5.3 per cent, providing a higher return for new investors but presenting a potential risk for others.
Gilt yields can influence wider financial markets and impact the wholesale rates used by lenders when pricing fixed-rate mortgages.
In this sense, mortgages can become detached from the base rate set by the Bank of England, which is currently at 3.75 per cent.
What do Government borrowing and interest rates mean for saving strategies?
Different saving strategies will be affected in different ways by the increase in Government borrowing, but those who have mortgages may not appreciate the impact.
As with other rising costs, an increase to the amount of a mortgage that must be paid in a month diminishes a person’s ability to spend or invest their money.
Even a relatively modest increase of £70 a month would mean £840 less over the course of a year that could otherwise be available for spending, saving or investing.
Other savers may benefit from increased rates, particularly those who supplement more efficient strategies through investment in gilts.
As gilts are typically used to provide a safe harbour for excess funds with limited expectations of them providing much of a return, the higher yields now available to new buyers will be welcome and could provide additional funds to use in more viable strategies.
Ultimately, each saver is different and only by considering a person’s unique position can the most appropriate strategy be determined.
Our expert team can help you to understand whether the Government’s increase in borrowing will prove beneficial or detrimental to your finances and saving strategy.
For expert support in finding the right saving strategy for you, speak to our team.
