• Base rate rises to 0.75%
• Inflation expected to hit 8% in the next few months
• Around 42 million Brits will never have seen inflation as high in their adult life
• Mortgage costs will rise £384 a year on £250k borrowing…
• …or £684 a year on £450,000 of borrowing
• Beware the lure of higher fixed rate savings deals
Laura Suter, head of personal finance at AJ Bell, comments:
“The Bank of England had to balance the competing demands of runaway inflation and the cost of living crunch crippling people’s finances – and this month inflation was the winner. The news on inflation is particularly bleak, with the Bank now expecting it to hit 8% in the next three months and ‘potentially higher’ later this year. If inflation hits 8%, around 42 million* Brits will never have seen inflation as high in their adult life. The CPI measure of inflation last breached 8% in April 1991, meaning anyone under the age of 49 hasn’t seen inflation so high in their adulthood.
“The Bank’s members have reined in some of their enthusiasm for rate rises from last month, when many voted to push rates up by 0.5 percentage points rather than the standard 0.25 percentage point jump. The increase to 0.75% today means interest rates are back to where they were pre-pandemic in March 2020.
“While a lot of the factors underpinning any decision look uncertain, this isn’t the last move expected this year. Markets expect four more increases this year on top of today’s, meaning that by Christmas 2022 we’ll have a base rate of 1.75%, if the expectations are to be believed. At that level we’d be returning to the interest rates of 2008, around the time of the market crash.
“Setting aside any future increases, even the 25 percentage point increase to 0.75% today will have a big impact on many people’s finances, with mortgage rates shooting up for those on variable rates and debt getting more expensive.
“Savers will get a boost from any increase, and rates have increased by a decent amount off the back of the last two Base Rate rises. In November last year, before the rate rises in December and February, the top easy-access savings account was 0.65% and now it’s 1% -- meaning banks have passed on almost all of the past two increases. However, this is only at the top of the best buy tables – most savers will have seen little increase in their interest rates unless they’ve switched accounts. Savers will have to get savvy with their money if they want to benefit from higher rates.
“All eyes will now be on the Chancellor at next week’s Spring Statement, as many households will find this further squeeze on their finances impossible to bear. The range of options for Rishi Sunak is vast, from uprating benefits by a higher figure, to increasing the energy loan support on offer or scrapping the National Insurance hike. But the Bank of England pushing up the financial burden on the nation today has potentially sealed his fate that he now can’t do nothing.”
*Based on ONS figures, with 41.5m people being 49 and under in the UK, meaning they would have been under 18 in April 1991.
Your mortgage will get more expensive
“Anyone on a variable rate mortgage will see their interest rates go up – mortgage companies are very quick to pass on the Base Rate hike. The shift up to 0.75% will mean someone with a £250,000 variable rate mortgage* will pay an extra £384 a year. If rates jumped by 0.25% at the next rate decision in May then that extra cost would be £768 a year. With higher borrowing of £450,000 the increase in costs is more dramatic, with those homeowners having to pay an extra £684 a year with today’s 0.25 percentage point rise.
“The current market expectations are that the base rate will rise four more times this year, taking it to 1.75% before the end of 2022. If this is the case, homeowners with £250,000 of borrowing will have to pay an extra £1,956 a year, or £163 a month, while those with £450,000 of borrowing will have to find an extra £3,528** a year – which is a lot of spare cash to find when so many other costs are already rising.
“One option is to fix your mortgage now, so you lock in current rates and avoid an interest rate rise. Mortgage companies have already increased their rates, and they’ll rise again after today. Someone with £250,000 of borrowing on the average variable rate mortgage now could save £4,184 over the next two years by switching to the current top two-year fix. If rates rise to 0.5% they would save £5,653 over the two years***. If someone wanted to switch for longer they’d save less each year, but more over the term of the fix.”
*Assumes a repayment mortgage with a 25-year term, at the current average variable rate of 2.47%, based on BoE figures.
**Based on current base rate of 0.5%
*** Assumes a repayment mortgage with a 25-year term, at the current average variable rate of 2.47%, based on BoE figures. Switching to the top two-year fix of 0.99% from Furness Building Society, on 80% loan-to-value, based on L&C calculations. Rate was still available at time of release.
You’ll need to hunt around for better savings rates
“While banks are very quick to pass on any Base Rate increases to their mortgage customers, savers have to wait longer and many won’t see any increase at all. Lots of people’s savings are just sitting in their current account or old savings account, earning 0.01%. And these people likely won’t see an increase in the interest rate they’re being paid, instead banks will pocket the difference to boost their profits.
“However, the best buy rates will improve. We’ve already seen an uplift based on the past two interest rates rises, with the top easy-access savings account paying 0.65% ahead of the December rate increase and now the top rate is 1%. It means that savers can finally get a bit more money on their cash, but they’ll need to put in some legwork to get there.
“However, even with that increase to 1% savers are still losing a large amount in real terms thanks to rising inflation. Inflation is now expected to rise to 8% next month, which means that with a savings rate of 1% savers are making a 7% loss on their money’s spending power. In reality, that means someone with £20,000 of savings is losing £1,400 a year in real terms. At a lower sum of £5,000 savers are losing £350 by sticking with an easy-access cash account.
“Savers who know they need access to the money soon or want the relative safety of cash have few other options, other than hunting around for the best rate. Some might be tempted to fix their money to get a higher interest rate. For example, the top two-year fix pays 1.9%* at the moment – meaning almost double your interest compared to an easy-access account. But savers need to seriously consider what interest rates will do in that two year period and if that deal will look attractive in a year or two’s time. While nothing is certain, markets are expecting more increases this year and for rates to be sitting at 1.75% by the end of 2022. If that’s the case we’ll see fixed rate accounts rise and anyone who has fixed won’t be able to benefit from that.
“Another option for those who want an inflation-beating return is to start investing some of their money. Cash is a great place for short-term savings or money you need quick access to, but it’s not ideal for long-term savings. So, work out what you need in the next five years or as an emergency pot, and see how that stacks up against the amount you’ve got in cash. If you’ve got way more than that set aside, think about investing it.”
*Based on figures from Moneyfacts, accurate to 17/03/22
