Laura Suter, head of personal finance at AJ Bell, looks at the Bank of England rates decision tomorrow and what it could mean for the country’s personal finances:
“With the Bank of England having held interest rates last month and many expecting them to be poised to rinse and repeat this month – we may have reached peak interest rates. Markets have priced in no further increases and for rates to flatline until August next year, when the Bank is expected to start cutting them back down again.
“It’s been a swift journey from the Base Rate sitting at just 0.1% less than two years ago – and no one expects the downward drop on the rollercoaster to be quite as rapid, or for rates to return to rock bottom again. But if we’re at peak interest rates, what does it mean for savers who’ve benefited from a surge in rates, mortgage holders, who’ve been pummelled, and everyone in between?”
Savings
“Rising interest rates mean that many savers have shed their previous apathy around chasing better rates. The fierce competition in the savings market means that many savers voted with their feet and jumped to the best paying account. Lots of savers are still doing this, with the latest stats showing that in September £13 billion was put into fixed-rate accounts as savers tried to snap up a good deal. But with some of the top rates having already been withdrawn, the end is nigh for savers waiting for the peak savings rate to hit. The news for anyone who has been waiting on the sidelines for even higher rates is: act now while stocks last.
“The same is true for those wanting to get a good easy-access account. While the rates on these accounts are variable and could be cut at any time, it’s a good idea to nab the top deal now rather than holding out for a huge increase. The reality is that while there may be some very small increases in savings rates, the general trend is going to be for a plateau and then fall.
“Higher interest rates haven’t sparked everyone’s excitement, and there is still a whopping £260 billion sitting in accounts paying no interest, according to the Bank of England. This has slid slightly from the record peak of £274 billion in June, but it’s still a huge sum that people are leaving to waste away. For some this will be short-term money they’ve left in their current account, but for others it will represent a huge amount of lost interest – particularly at a time when inflation has only just slipped out of double digits.”
Mortgages
“The thought of peak interest rates might be tempting more homeowners to opt for a tracker rate mortgage, in the hope that the Bank of England cuts rates more rapidly than expected and they reach the halcyon lands of falling mortgage costs. However, what the past few years have taught us is that the economy and its outlook can change rapidly, so tread with caution when betting a huge financial decision on current expectations.
“Tracker mortgages can be a great option if you want more flexibility, know that you might want to get out of the mortgage sooner or want to overpay by more than the usual limits. But if another interest rate hike would take you beyond your affordability limits, picking a fixed rate account might be better for you. Just because rates are not expected to rise further, things can change and it isn’t a cast iron guarantee.
“We know that after the mini-Budget a year ago lots more people plumped for a tracker rate mortgage, in the hope that rates would fall and they could lock in a deal. The proportion of new lending on a variable rate went from 6% of all mortgages at the end of last year to 16% in the second quarter of this year. But unless those people timed their re-entry into the fixed rate mortgage market impeccably they will have seen higher costs in that time.
“The worst option for someone whose mortgage deal is ending is to drop onto a Standard Variable Rate (SVR) mortgage. As Base Rate has shot up these have reached eye-watering levels and even a couple of months on this rate could equal financial calamity for some homeowners. The average SVR has gone from 4.41% two years ago to 8.18% in October, according to Moneyfacts. If in doubt, speak to a broker who can help you to work out the best route for you.”
Loans, credit cards and other debts
“It’s no surprise that as Base Rate has risen so too has the cost of debt. Credit card and loan costs have risen, interest free periods have shortened and the availability of low cost debt has shrunk. Average credit card interest rates hit an all-time high this summer, of almost 32%, according to Moneyfacts*. This has coincided with a time when lots of people have had to turn to debt as rising prices have pushed them into putting everyday essentials on plastic.
“But the good news is that if rates plateau then at least the interest charged on your debt shouldn’t increase significantly from here. However, we know that debt costs tend to rise like a rocket and fall like a feather, meaning that anyone hoping for a dramatic drop in credit card or loan interest rates could be out of luck.
“If you’re applying to borrow money the rate you’re offered will depend on your credit rating and how much debt you have already, so while average rates are useful, they aren’t accurate to what you’ll actually be offered. The same is true for interest-free periods – if your credit rating isn’t the best you could be offered a shorter period. But shopping around is the best way to ensure you get the cheapest rate – don’t just default to your current bank account provider.”
“Annuities are priced based on UK government bond yields, and as interest rates have risen gilt yields have improved too. Annuity providers tend to buy 15-year gilts, and the yield on those has increased from less than 1% two years ago to 4.8% today. That means that annuity rates have soared recently, so your pension pot will buy a much bigger income than two years ago. But if rates flatline and then drop, so too could gilt yields. Although, gilt yields are also priced based off other factors, such as the state of the economy, government moves and market expectations.
“As a result annuities could be back on the radar for millions of retirees who might not have factored them in previously, due to low rates meaning a low income for your pension pot. However, there are far more factors to consider than just price when weighing up the pros and cons of annuities vs drawdown. Annuities offer a guaranteed income but are inflexible, once you’ve used your pension fund to buy an annuity there is no backing out. Meanwhile drawdown carries investment risk but is more flexible to tailor your income to your needs and gives the potential to enjoy further investment growth, as well as attractive death benefits. But for some retirees picking both is a good option – using some of your pension pot to lock in a guaranteed income for life, while leaving some of the pot to access flexibly, or leave in a tax-efficient way for beneficiaries.”
*Based on the average purchase APR, which includes card fees.
