The Bank of England recently announced that it would be holding interest rates at 5.00%. The Bank of England last dropped interest rates for the first time since the COVID-19 pandemic in August 2024 but has now announced that rates will remain unchanged at 5%.
Interest rates can have far-reaching impacts on things like mortgages, savings and investments. So what does it mean for contractors? In this guide, Umbrella Search outlines what every contractor can expect with the recent announcement to help everyone plan for their financial well-being in the future.
What does it mean for Mortgages?
For contractors, securing a mortgage can be trickier than for their employee counterparts.
This is due to the fact that contractors don't have full-time employment; instead, they work on different contracts throughout the year. This unpredictable working pattern and subsequent unpredictable pay packet can lead some lenders to be cautious about lending to workers such as contractors who can't always show a stable paycheque at the end of each month.
So, what do base rate changes mean for contractors and their mortgages?
Variable rate mortgages
As you will be aware, there are different types of mortgages on offer. Let’s start by looking at a variable rate mortgage.
With a variable rate mortgage, your payments are linked directly to the Bank of England base rate. This means that if the interest rates rise, so will your monthly mortgage payments.
For contractors who have variable income due to the variability of contracting work, this may cause financial strain in instances where the base rate rises or stays high. Some contractors on a variable rate mortgage may have been hoping for a drop to the base rate of interest, and will be disappointed that this stayed at 5%.
Fixed rate mortgage
Rather than a variable rate mortgage, the other option is a fixed rate mortgage. With a fixed rate, mortgage holders aren’t impacted by changes in interest rates. However, once your fixed rate mortgage comes to an end, you will then be faced with either higher or lower rates depending on current interest rates, meaning there is risk involved. Contractors who are currently coming to the end of a longer-term mortgage rate, such as a 5-year term, may now be facing much higher mortgage rates due to the increase in interest rates in the past 5 years. However those that secured fixed rate mortgages in the last two years now coming out of their terms will be facing slightly lower rates which is good news for these contractors.
What does it mean for savings?
On average, contractors earn more than their employee counterparts and are able to charge high rates for their expertise and skills. This means that contractors are in good positions when it comes to saving.
So what do current interest rates mean for contractors and their savings?
The good news is that interest rates remain high at 5% which means that contractors will benefit from good returns on their savings.
Contractors may consider looking at fixed term savings account which will lock in the current interest rate on offer. The downside is that contractors won’t be able to access these funds usually for a period of 1-2 years, however you should see good returns on these savings with the current interest rates be locked into place.
Contractors should also consider an ISA as a tax-efficient way of saving.
Impact on borrowing
Some contractors will rely on business loans or credit in order to manage business expenses or to fund growth. Depending on what sector you work in loans or credit may be crucial for you to carry out the contract work at hand.
For these contractors, the base rate staying at 5% will mean that borrowing still stays expensive (although slightly cheaper than before).
Contractors that have variable-rate business loans or credit will see their repayment costs decrease slightly. This is worth considering if you are looking at taking out loans for things like equipment, marketing, office space or courses that you need to advance your contracting career.
Impact on Pensions
Pensions that are invested in bonds or stocks will be impacted by the interest rate. As contractors usually rely on a personal pension pot rather than one contributed to by their employer, they need to ensure that they manage their pension pot well to secure long-term financial security.
Next steps for contractors
Having read our guide, you will see that base rate changes bring both advantages and disadvantages to contractors. You may face rising mortgage rates which means you’re paying more back each month, as well as hikes to borrowing which can impact your ability to function or grow as a business. However, for contractors with savings you will see a greater return on investment meaning more money in your pocket here.
It is always worth staying up to date with latest changes to the base rate in order to fully understand what changes mean and how these will impact you as a contractor going forward.
If you’d like to free up more of your precious time to ensure you’re clued up on the best ways to stay financially savvy as a contractor and secure a better future, why not consider using an umbrella company?
Using an umbrella company will mean that you have more time to do the things that matter, such as planning for the future. This is because the umbrella company takes on tasks such as admin, processing expenses, payroll, taxes, invoicing and liaising with the client. This gives you more time to focus on the contract at hand, as well as more free time to focus on things like planning ahead.
If you’d like to find an umbrella company that can help you, the Umbrella Search team is here to help. Get in touch today and our team will help you take the first steps today.
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