The Bank of England Monetary Policy Committee has raised rates 0.75 percentage points to 3%. It’s the biggest rise for 33 years, taking rates to their highest point since they were slashed during the financial crisis – at the end of 2008. What it means for mortgages and savings
Sarah Coles, senior personal finance analyst, Hargreaves Lansdown said: “The Bank of England threw a black cloud over the UK economy today, shrouding it in gloom. It warned that we’re set for a miserable recession throughout next year and the first half of 2024. While this will dampen inflation, it will also pour a bucket of cold water on the labour market, so after such a long period of our wages falling behind inflation, we run the risk of losing those wages altogether.
For savers this adds insult to injury, because on top of all of their economic woes, they know that rising savings rates aren’t necessarily going to last. The small sliver of good news comes for borrowers – who might not see mortgage rates rise as high as they feared. The Bank currently forecasts that interest rates will rise to 5.2% in late 2023, before starting to fall back.
The pain of inflation isn’t over yet. The Bank now expects it to be 11% in the last three months of this year, before dropping back from early 2023 as previous energy price hikes drop out of the calculations.
When it starts to fall, it isn’t going to make life any easier, because it’s going to be accompanied by recession. GDP is expected to fall about 0.75% during the second half of 2022, as higher energy prices put the squeeze on our disposable income. It’s then expected to keep falling through 2023, and the first half of 2024. Meanwhile wages will fall 0.25% behind rising prices this year and 1.5% behind in 2023, and the unemployment rate is forecast to hit 5.9% at the end of 2024 and 6.4% by the end of 2025 – up from 3.5% in the three months to August.
For now, rates are on the rise, with the biggest jump in more than three decades, but this is likely to have less impact on savings and mortgages than you might expect. Fixed rates in particular may well be held back by the fact that the Bank doesn’t see higher rates enduring.
What it means for mortgages
For almost 2 million homeowners, who are on tracker mortgages or a standard variable rate, the pain of this rate rise will be passed through into mortgages before you can say ‘budgeting nightmare’. According to Moneyfacts, the average standard variable rate is currently 5.4%. If you have a £250,000 mortgage over 25 years, and the full rate was passed on, it would mean the SVR would rise to 6.15%, which could push monthly mortgage payments from £1,520 to £1,643 – so you would need to find another £123 a month.
Fixed rates have dominated the market for a significant period, which has been protecting mortgage holders from these rises. However, increasingly there’s the chance that people whose fixed rates are coming to an end could decide to revert to the SVR, because they’re worried about fixing at what might be close to the peak. They might be rewarded with a slightly lower rate in the long term, but they’ll pay the price of being increasingly squeezed in the short term. For them, this month’s rate rise is unlikely to be the last of rate rise pain.
For anyone planning to fix right now, the rate rise isn’t necessarily the bad news it may initially seem. The mortgage market has been driven most recently by gilt yields – and future rate expectations into 2023. As those expectations and yields have fallen back, mortgage rates have eased off very slightly. Given that a 0.75% rate was already largely priced into fixed rates, it’s unlikely to change things dramatically.
What it means for savers
The fact that this rise was so widely expected means it’s likely to be business as usual for savers. The big high street banks have crept fractionally higher in the past month, so that some branch-based easy access accounts are offering 0.5% – but it still represents a tiny fraction of the rises we have seen from the Bank of England since December.
They have so much cash sloshing around that they’re not in any hurry to attract any more with better rates. This is unlikely to change any time soon, because the savings ratio is expected to rise from here, as savers see the looming recession and try to build up whatever savings buffer they can afford. The big high street banks are goig to attract more cash without trying. It means it’s up to the smaller, newer and online banks to bump rates up. They don’t want a vast amount of new cash, and they don’t want to pay more than they have to for it, so they’re likely to continue nudging rates up a fraction at a time.
If you were waiting for a better rate in order to fix, you’re not going to get it overnight, so you need to be clear about how long you’re prepared to wait, and what rate you’re willing to fix at, or you risk waiting so long you miss out on the best of the rates.
Given that the Bank expects rates to peak at the end of next year, if you’re fixing for a year you may not want to wait too long, because the banks will start factoring falling rates a year ahead into their fixed rates. It’s also well worth bearing in mind that savings rates are forwards-looking, and inflation is backwards-looking – so to keep pace with inflation, you’re aiming to beat the inflation rate forecast for this time next year – which the Bank estimates at 5.2%. Right now you can get up to 4.6% by fixing for a year – which isn’t far off.”