The heat is rising with increasing interest rates

By: Raoul Ruiz Martinez

Investment Advisor

Finesco Financial Services Ltd.

INTEREST RATE decisions by the Bank of England will already be dominating the headlines in the UK but just how much higher will interest rates need to go?

Various financial sources are speculating further rises this year to over 5.75 per cent and that they will remain in this region for some time.  This will create pain for the mortgagee but gain for the saver.

The UK economy has enjoyed its longest period of economic expansion for 200 years but pricing pressures are rising and, with inflation above target at 3.1 per cent, an increase in base interest rates is often an effective method of slowing down inflation.

Householders with mortgages will hope that higher interest rates will last only briefly, but for those of you living in Portugal you may be lucky enough to either have no mortgage at all or, if you do have one, it is denominated in euros.

One man’s loss is another man’s gain?

While increasing UK interest rates will adversely affect the mortgage market, on the flip side of the coin, savers with capital tied up in Sterling based accounts will look to benefit from these growing levels of interest rates. In addition, living in the Eurozone, you will already enjoy a headline rate of inflation at 1.9 per cent which is significantly lower than the UK and so your Pound (and ultimately your Euro) will go a lot further while living in Portugal.  In short, this is a financial opportunity where you have an increase in savings levels with greater spending power – the best of both worlds – at little risk to you, the saver, since your money is deposited with the bank.

If you still hold a UK savings account you may already benefit from an automatic increase but not realise that these increases are still below the base rate and not adjusted for tax.

As a Portuguese tax resident, if you have not done so already, it is worth considering a move of your UK savings into a Sterling based offshore bank account.  There are many recognised UK high street banks that have branches in long-standing and well regulated jurisdictions such as the Isle of Man and the Channel Islands.  Abbey (Banco Santander), Royal Bank of Scotland and Barclays are just a few of a number of these institutions.

Both types of UK “onshore” and “offshore” accounts will benefit from rising interest rates for the retail or private investor.  Again, their savings rates are normally below the UK base interest rate, and will be subject to tax in one way or another.  This can be quite significant when your savings or investment starts in five figure numbers.

There are other types of savings or deposit accounts with the same type of institutions known as Market Rate accounts that are available to the institutional investor.  Just as a larger loan will benefit from reduced rates, a larger amount of capital intended for deposit will benefit from higher rates.

Excellent rates of return

On amounts starting at 20,000 to 50,000 pounds sterling, the retail investor can benefit from institutional market rates that are now reaching levels of over six per cent for the similar amount of risk as if holding these savings with your UK high street bank.  Not only that, there are mainstream and tax-efficient holding structures available through large corporate institutions that can hold these types of savings accounts.

Any initial charges should recuperate costs in tax, providing you with excellent rates of return to make your capital last much longer, and your spending in Euros go much further as UK interest rates and inflation rise.

If this situation relates to you, seek structured advice from both your investment and tax advisers before you take action as interest rates start to heat up this summer.

Raoul Ruiz Martinez is based in the Algarve office of euroFINESCOs.a. as an Investment Adviser for Finesco Financial Services Ltd., Glasgow and regulated to advise on capital investments in both the UK and Portugal.