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What would a Bank of England interest rate increase mean for lenders?

Posted on 22 Jul 2014 by Mat Gazeley

The Governor of the Bank of England, Mark Carney, recently suggested during his Mansion House speech that an interest raise rise “could happen sooner than markets currently expect”, leading many analysts to suggest it may happen as early as the end of this year.

Carney later back-tracked, indicating that the first interest rise is actually more likely to happen in 2015. But whether the central bank raises interest rates this year or not, it seems likely a rate hike is on the horizon.

With this in mind, we look at the potential impact rising base rates could have on lending rates at Zopa.

If Mark Carney’s recent forecasts prove to be correct, and the Bank of England gradually raises interest rates to 2.5% by 2017. In that case, the blended return for lending through Zopa would also likely rise in line with the base rate increase, reaching potentially 7% in 2017.

In this scenario, for someone who lends £5,000 through Zopa, it could yield anywhere between £985 to £1,007 by the end of 2017, assuming all repayments are re-lent. Meanwhile, the same £5,000 would only earn £308 in interest if deposited in a savings account paying Bank of England’s base rate. (Edited 28/07/2014.)

Graph Source: Zopa data

Assuming interest rates stay the same, lending £5,000 through Zopa today at 5% and continuing to relend your returns to benefit from compound interest, your initial £5,000 would still grow by £931.06, or 18.6%, by the end of 2017. For comparison, the same amount deposited in a savings account at the Bank of England’s base rate of 0.5% would only grow by just £88.05, or 1.8%, by December 2017.

Unfortunately we don’t hold a crystal ball so cannot be certain when the Bank of England will begin raising interest rates, and how high they will go. But we are confident that if rates rise then lending rates through Zopa will also gradually increase as well due to market forces. This means that from a lending point of view this will have a positive effect on your money and growing your savings for the future.

One thing that is certain for now is that the returns on offer through Zopa are great value at 5.2% after fees through our Rate Promise. For more information about lending through Zopa please visit our lending page.

Category: Lending
Tags: economy

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