Red-hot inflation flips the script.
Commenting, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “The Bank of England has been winding up interest rates since December 2021, approving 12 consecutive increases to the base rate, which has upped borrowing costs and brought the golden era of low mortgage rates to an end – but there has also been a reprieve in savings rates.
“Not long ago, there was a belief among many economists that the interest rate hike cycle was coming to an end, but the persistence of double-digit inflation has flipped the script. Inflation is proving to be too hot and sticky, which means that interest rates may now peak at a level that exceeds initial forecasts.
“The double whammy of high inflation and high borrowing costs looks set to continue battering household budgets. As such, it remains important to keep a keen eye on your finances and understand how another hike in interest rates could affect you."
“While its moves are influential, fixed mortgage rates don’t respond directly to the latest BoE interest rate decision. They will instead respond to the outlook for the economy and inflation – assessed through the movements in bonds yields. This is one of the main reasons why fixed mortgage deals have actually gone down since the autumn, when bond yield surged in the aftermath of the ill-fated mini-Budget, while interest rates have moved in the opposite direction. But uncertainty prevails, and the 1.4 million households* in the UK coming off ultra-low cost fixed rate deals in 2023 have some acclimatising to do.
“Variable rate mortgages aren’t affected in the same manner – they are tied to the movement in the base rate. As such, the approximately two million borrowers on variable rates could see their monthly mortgage payments increase – at a time when many can least afford it.
“Those approaching the end of their mortgage deals could benefit from being proactive in seeking the best deals now to have more options on the table further down the line. All mortgage offers are valid for a fixed amount of time. Typically, they will last between three and six months, depending on the lender. You are not tied to mortgage contracts until you sign on the dotted lines, so you can ditch it if you find a better deal in the interim.”
“Cash savings are back, after years in the doldrums in the fallout of the financial crisis 15 years ago. Another uptick in the base rate could push savings rates even higher – but there are no guarantees. The acceleration in the frequency of rate rises has meant that some savings providers may still be catching up to past base rate rises. It could take months for the increase in interest rates to trickle through to savers – if at all.
“But the uptick in savings rates has been devastated by inflation, which has surged much higher, meaning you'll be able to buy less with your money. In fact, the real value of cash savings has been eroded at an alarming rate in recent history.
“Those who can afford to put money away for five years or more should consider investing for the potential of long-term inflation-beating returns that far outstrip savings rates. Investing can be volatile on a day-to-day basis and while the potential for greater returns from the stock market comes with inevitable risk, taking a long-term view means you can smooth out some of those highs and lows while benefiting from the long-term potential that comes with this approach. You can invest from £25 per month, and some platforms, such as interactive investor, offer a free regular investing service.”
“When it comes to borrowing, common debt arrangements such as a personal loan or car financing won’t usually be affected by changes to interest rates because a fixed rate of interest is typically agreed before the loan is taken out. However, the rate of interest applied to credit cards and overdrafts could go down - even though they are not directly linked to the BoE base rate.”
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