Global uncertainty is directly affecting our financial position in the UK, with prices rising and businesses under pressure from a variety of issues.
The impact of the war in Ukraine has had an effect on the price of gasoline and the cost of everyday items. The economic uncertainty it has created has also made the Bank of England’s interest rate decisions more difficult.
The idea of raising interest rates is to control current and forecast price increases as measured by inflation. This may be a relatively raw tool in the face of dramatic global change. All eyes will be on the banks’ long-term strategy.
For now, policymakers have raised rates from 0.5% to 0.75%, the third increase in four months.
Higher interest rates make borrowing more expensive. For households, this can mean higher mortgage costs, although – for the vast majority of homeowners – the impact is not immediate and some will get away with it altogether.
The impact of higher savings rates may far outweigh the impact of lower deposit values.
Homeowner impact
There has been an extraordinary period of cheap mortgages in recent years, but even before the Bank of England’s rate-setting Monetary Policy Committee began raising rates in December, there were signs that the era of ultra-low mortgage rates was over.
Some lenders have raised rates on applications for new home loans.
However, brokers predict that any rise in mortgage rates will be “slow and measured,” meaning that mortgages will remain cheap by historical standards for some time.
A little known fact is that only about one-third of adults have a mortgage.
About a third rent, and another third have either never had a mortgage or have paid it off. These figures come from the British Housing Survey, which is geographically limited, but one of the most comprehensive guides available.
Some 74% of mortgage borrowers in the UK are on fixed-rate deals, so their repayments only change at the end of their current term, according to banking trade body UK Finance. About 1.5 million fixed-rate deals will mature this year and another 1.5 million will mature in 2023.
The remaining 850,000 homeowners use tracker deals, and another 1.1 million use standard variable rates (SVR). They are the ones who will likely feel the impact immediately after the bank rate increase.
The increase in Bank Rate to 0.75% means that the typical tracker mortgage customer will see their monthly repayments increase by £25.76. UK financial data shows that the typical SVR customer could be paying £15.96 more per month. This is on top of similar increases in previous months.
That means a further squeeze on household budgets at a time when bills are rising and people have grown accustomed to years of cheap borrowing and relatively slow price increases.
Since 2014, every mortgage applicant has been required to prove in a stress test that they can pay at around 6 or 7 percent – the idea being that small rate rises may be uncomfortable for homeowners, but not unmanageable. However, the Bank of England plans to drop that requirement and close its consultation on the proposal in May.
Time to save?
Given that the spending power of these funds is being eroded by inflation, any improvement in savings rates will have a very limited impact on the value of the money stashed away.
Analysts warn that there is no guarantee that higher bank rates will be reflected in better returns on savings.
Savers are often borrowers too, but the money in the bank has actually been losing value for some time.
Anna Bowes of the website Savings Champion says it is “really disappointing” that many providers have been so slow to respond to the Bank of England’s prime rate increase.
People receive pence for every £100 they deposit in their savings over a year. The bank’s interest rate hike will not help change that.
The average interest rate on easy-access accounts you can open today is 0.2%, up from 0.17% in December. For easy-access accounts closed to new customers, the rate is 0.26%, up from 0.22%.
The rate for the highest earning easy access accounts was 0.84%, up from 0.71% in December.
The best easy access savings rate in the market over the past five years was in September 2019, paying 1.6%.