AJ Bell press comment – 22 September 2022
Laura Suter, head of personal finance at AJ Bell, comments:
“Once again markets and the Bank of England are not on the same page, with markets expecting a 0.75 percentage points hike to rates and the Bank delivering just 0.5 percentage points. The increase from 1.75% to 2.25% still takes us to another 14-year high, with rates last at this level in 2008 when the Bank was rapidly trying to cut them.
“It seems the Bank itself was divided on the route rates should take, with the committee split on whether rates should rise by 0.75 percentage points or 0.5 percentage points, and one lone figure voting for a smaller 25 basis point rise. Despite the lower-than-expected increase, the rate rise train is going full steam ahead and there are no plans to stop here – the latest expectations from markets are that rates will peak at 4.75% by the middle of next year.
“The moniker of ‘Awful April’ will rear its head again, as potentially the biggest nugget of information in the Bank’s report is that the UK is already believed to be in recession and has been since April. It recorded a decline in GDP in Q2 this year and a 0.1% drop is expected for Q3. This is a significant reduction from the 0.4% growth for Q3 predicted just a month ago, and is not news markets, or the public, will welcome.
“One brighter spot is that the Bank now expects inflation to peak at a lower rate next month, hitting 11%, thanks in part to the Government’s Energy Price Guarantee. However, inflation is still expected to be above that crucial 10% marker for the rest of this year and potentially into 2023, meaning the winter crisis facing much of the population hasn’t been averted.
“The rate rise is a mixed bag for the UK public: it’s great news for those with savings, who are experiencing the most competitive market in a decade, but worrying news for anyone with debt, as they see their costs rise yet again.”
Savings bonanza continues
“Today’s hike gives another boost to the savings rates bonanza we’ve seen so far this year. Top easy-access savings rates have leapt up from 0.65% before the Bank’s rate rise spree began, to 2.1% now – and will no doubt climb further after today’s news.
“Despite that, most savers will be missing out. Millions of pounds will be sitting in accounts earning very little interest. Savers who do nothing, get nothing – they’ve got to switch to get a better return on their money. Almost anyone with money sitting in a current account, or who has had their savings account for a year or more, could get a better rate by switching. If you’ve got £10,000 in cash and it’s earning no interest, you could be missing out on £210 a year by not switching to the best easy-access account. Opening an account now only takes a few clicks, meaning that you could get a decent return for 10 minutes of work switching accounts.
“The fixed-rate savings market has gone like the clappers, with savers able to get rates they’ve not seen for a decade. But anyone about to fix needs to think carefully, as they’ll miss out on any rate rises that happen during that fixed period. It’s impossible to get your crystal ball out and predict exactly what the Bank of England will do, but it looks likely that rates will rise further – markets are predicting further rises by the end of the year and for rates to peak at 4.75% next year – which means fixed rate deals could have a long way to go from here.
“Some savers might decide to park their money in the top-rate easy-access savings account and see if fixed-rate deals have improved by the end of the year. Another option is splitting your money and saving some in a fixed-rate deal now and keeping the rest to lock in a deal later.”
Mortgage companies get pickier
“The Bank warned that as well as hiking rates, some mortgage lenders are getting more picky with who they will lend to. With the prospect of the UK already being in recession and potential job cuts on the horizon, as well as tough price rises this winter, mortgage lenders are tightening their criteria. This means that those with smaller deposits or who are borrowing the maximum amount will find fewer lenders willing to give them a mortgage and the loans they can get will come with a higher rate attached.
“Just over a fifth of all mortgage holders are on a variable rate deal, meaning around 1.9m homeowners could be hit with a record rise in costs after today’s hike. Of those on a variable rate, around 800,000 are on a tracker deal and the remainder are stuck on the most expensive option – the standard variable rate.
“The average UK homeowner has £131,000 of mortgage debt, according to UK Finance, and so those on a tracker deal will see their mortgage costs rise by an average of £396 a year* thanks to this latest hike. When you extend this over the 1.9m people who have a variable rate mortgage, it leaves UK households with an estimated £752m hike in their annual mortgage bills just from this rate rise alone.
“For someone with £200,000 of borrowing* a rate rise of 0.5 percentage points will add another £624 onto their mortgage costs each year – or £52 a month. On £400,000 of borrowing that 0.5 percentage point rise will mean a £1,248 rise in the annual mortgage bill, or £104 a month.
“The group headed for the biggest shock are those who fixed their mortgages two years ago, on rock-bottom rates, and now need to remortgage in a far pricier market. Assuming all of today’s increase is passed on in mortgage rates, someone coming off a two-year fixed rate mortgage deal now, who had a £200,000 mortgage on a 25-year term when they took it out in 2020, will face an extra £2,736 a year in mortgage costs when they come to refinance their debt**.”
*Assumes a repayment mortgage with a 25-year term at current average variable rate.
**Based on 75% loan-to-value. Mortgage calculations based on £200,000 of borrowing over 25 years when original fix was taken out, with new fix keeping same mortgage maturity and accounting for no additional borrowing or overpayments
