The Bank of England has raised interest rates to four per cent, in a widely-expected move that has implications for both borrowers and savers.
Adjusting personal finances to this ‘new normal’ of higher interest rates will be a challenge for most households, admitted Paul Wilson, chief Investment officer at Channel Capital.
He said although a decade of record-low interest rates was not economically healthy or sustainable,”moving from all-time lows to a 15-year high of 4 per cent in the space of 14 months has inevitably created challenges for lenders and borrowers alike.”
What the rate rise means for mortgages
Mortgages are getting more expensive, but for over a decade – before the current run of rate rises – they had been at historic lows.
Although mortgage rates are not expected to reach the highs of the early 1990s, the rises will come as a shock and were not helped by last year’s mini budget fiasco.
Steve Seal, CEO, Bluestone Mortgages, pointed out: “Interest rates have now risen for the tenth consecutive month, pushing mortgage repayments higher yet again. As a result, affordability challenges will likely remain.”
The most recent rise will have an immediate impact on those with a variable rate mortgage, an estimated nine per cent of UK mortgage borrowers are on mortgages where they pay a variable rate of interest.
It is these borrowers who face an increase in their next monthly mortgage payment.
UK Finance, said around 12 per cent of borrowers are on what is known as a tracker rate, this caps the amount of interest they pay but because it is still a variable rate their home loan bill will also rise.
Mike Stimpson, partner at Saltus said: “The last rate rise – the third consecutive 0.5 per cent hike – could have a significant effect on homeowners, many of whom are already struggling to cover their monthly payments. For a tracker, currently on 4.5 per cent, a 0.5 per cent rise will add an extra £41 to the monthly payment on a £150,000 mortgage arranged over 20 years.
The Saltus Wealth Index Report revealed that a third (35 per cent) of mortgage holders are already struggling to cover the cost of the last two rate rises, while a further 43 per cent admit any further increases will cause them to struggle.
Stimpson said: “Of those who said a further rate increase would cause issues, one in seven (15 per cent) said they would switch their mortgage to interest only to cope, one in five (22 per cent) plan to reduce their pension contributions, whilst one in 30 say they would have consider selling their property to move somewhere cheaper.
“Economists believe the rate could rise again next month before levelling out. Any homeowners concerned about the impact of this should talk to an adviser, or their mortgage provider, about their options.”
Options for those struggling with their mortgage would appear to be, either try and fix their rate if they have not, or see if they can switch to an interest-only deal, although this will mean they are not paying off the capital part of their mortgage.
Seal said borrowers should not be worried about seeking support: “For those who are struggling in the current situation, remember that hope is not lost and there’s help at hand. Not only is there a wide range of support available for customers struggling with their financial situation, but we’re likely to see rates come back down later this year. “
“Now more than ever, specialist lenders have a vital role to play in supporting the customers who do not fit the ‘vanilla’ category. It’s the duty of this industry and at the heart of what we do to ensure these customers can still reach their homeownership dreams.”
To fix or not to fix
Simon Gammon, managing partner at Knight Frank Finance, said some longer fixed-rate mortgages may get cheaper.
“Before Thursday’s decision, the best five year fixed products could be found as low as 4.19 per cent, while the best trackers sat at around 3.94 per cent.
“Tracker rates will now rise and we now expect many five year fixed rate products to be cheaper than tracker products for the first time since the mini-budget. Many buyers have been waiting on penalty-free tracker products for fixed rates to fall. This could be the moment that we see large numbers opt to switch to fixed products, because it’s unlikely that we’ll see rates fall much further.”
What the interest rate rise means for pensions
Andrew Megson, chief executive of My Pension Expert, said: “Another jump in interest rates, now to a 15-year high, would be great news for pension planners in times of stability – but we’re not in those times. The base rate is still less than half the rate of inflation, meaning people’s savings are losing value in real terms.
“Living costs are continuing to rise and this is placing relentless pressure on retirement plans. My Pension Expert’s own research found that only 35 per cent of Britons think they’ll be able to retire when they want to. It certainly seems that Jeremy Hunt might get his wish to keep more people in their 50s, 60s and even 70s staying in work. But, of course, it is not for him to demand that.
“Rather, everything possible should be done to support people in their financial planning, allowing them to achieve the retirement they deserve despite these volatile economic times.
“To that end, more should be done to champion the role of independent financial advice. While there are likely to be tough times ahead, seeking advice will provide welcome reassurance that Britons are doing all that they can to protect their hard-saved pension savings and achieve their retirement goals.”
What the interest rate rise means for savers
Lucinda O’Brien, savings expert at money.co.uk said rising interest rates are good for savers, as they should mean that your savings increase at a greater rate, in theory.
She said: “If your savings account tracks the Bank of England rate, then you’ll benefit in full from any increases. However, for other accounts, it’s up to banks and building societies how much of the increases they pass on to savers.”
O’Brien said the BoE rate increases meant that it was a good time to save and there are better deals available.
As always, you should try and shop around to get the best deals possible on savings accounts to see where you can get the best rate. “Switching is usually an easy process that can be completed within minutes online, so it’s worth looking into.
“You should also be on the lookout for bonus rates that are offered to attract new savers. These can be a good way to boost your savings but make sure to note when the bonus period ends so that you don’t get caught out.”
How long can you afford to lock your savings away for
“You also need to think about how long you’re happy to lock your savings away for and how easily you need to access them. For example, a fixed-rate account may have a good rate, but with things changing so rapidly at the moment, you may want to change in a few months.”
“On the other hand, an easy access rate might have lower rates, but allow you to withdraw easily. That kind of flexibility could be very useful in the current climate, where switching accounts frequently could be beneficial,” added O’Brien.
Have two savings accounts
According to O’Brien many high street easy-access savings accounts may not pass on the interest rate rise,
‘To feel the maximum benefit of the hike, you should move your money to a higher-interest fixed-rate savings account and keep it there.
“In January 2022 the average interest rate for a one-year fixed rate bond was 0.71 per cent, but by the beginning of December 2022 it had risen to 3.61 per cent.This month, the average interest rate for a one-year fixed rate bond stands at 3.59 per cent – a slight decrease from December – but still a 406% increase from last year.
“In comparison, a five-year fixed rate bond had an average interest rate of 1.62 per cent in January 2022 and 11 months later it had risen to 4.36 per cent. “
What the rate rise means for small businesses
Lionel Benjamin, co-founder at AGO Hotels: “The hike of interest rates to four per cent may be a necessity to kerb inflation, though the impact on the hospitality industry is not good news.
Benjamin said the hotel sector was grappling with several challenges specifically rising energy prices and third-party suppliers upping their prices in line with inflation.
“AGO Hotels have seen overall costs rise to an average of 43 per cent from 36 per cent over the last six months. Today’s announcement means a further tightening of the purse strings with spending needing to be managed particularly carefully, especially as these additional costs cannot make their way to the consumer.
“Interest rates are impacting deals in the market. There has been a slowdown in transactions as investors evaluate the impact of interest rates on the cost and availability of debt. We are also seeing a debt funding gap as lenders adopt a view of declining real estate values versus pre-pandemic levels.
The sector held its own in 2022 with some record growth in rate and occupancy, this performance recovery may stall as we face uncertainty in the market and operational costs continuing to rise. However, the sector remains of significant interest to the long-term investors who understand the cyclical nature of hospitality.”
What does the rate rise mean for house prices
Alex Lyle, director of Richmond estate agency Antony Roberts, said: ‘The £1.5 million-plus house market remains relatively resilient to rising interest rates although admittedly we are not registering the same volume of new buyers as this time last year.
“Overall though, prices are holding and in some cases exceeding expectations, as a significant percentage of buyers within this section of the market do not require mortgage finance. We have seen three sealed bids since the start of the year, with two leading to record-breaking off-market sales. Both were cash buyers.
“The market for properties sub-£1m is much less active and less secure. Given that it’s the tenth rise in a row and we are already working with a smaller pool of buyers, this latest rate rise will not be helpful to the market.”
Avinav Nigam, cofounder of real estate investment platform, IMMO, said rising interest rates have major consequences for the housing market.
“There is an immediate increase in the cost of mortgages for the circa two million borrowers on variable-rate mortgages, which could mean an increase in the supply of properties for sale, with negotiating power shifting to buyers.
“That said, a significant reduction in property prices is not anticipated since demand for homes is strong and growing. Higher interest rates alongside labour and material price inflation mean that building new homes is getting harder and more expensive. Many projects are being paused, reducing future supply.
“Higher rates further reduce aspiring homebuyers’ ability to afford to purchase a home, reducing demand. The result of this is more demand for rental housing, and therefore a greater need to put time, money and effort into improving our private rental sector housing stock.
“The institutional investors we work with tell us that as interest rates rise, investing in and improving rental housing makes even more sense commercially and socially.”