Flurry of fixing: rates set to rise, but fixed rate deals may be near the peak

Sarah Coles, head of personal finance, and Helen Morrissey, head of retirement analysis, at Hargreaves Lansdown, give their perspectives on the news of a flurry of fixing as rates are set to rise, while fixed rate deals may be near the peak.

Key points:

• • The Bank of England is widely expected to raise rates next week, up 0.25pp to 5.25%. It’s also expected to raise them again in September to 5.5%, and then hold.
  • Inflation is forecast to fall as we go through the rest of 2023, and could end the year around 5%.
  • Mortgage rates may well have peaked. Although they tend to move more gradually, we may be near the peak for savings rates too. Annuities are also looking strong.
  • Savers have recognised the opportunity and we have seen a shift into fixed rate accounts on HL’s Active Savings platform. 74% of new money in July has gone into fixed rate accounts – up from 66% in June. The majority of this is fixed for a year or less.

Sarah Coles says:

“We’ve seen a flurry of savers fixing their rates while the going is good.

“It’s a sensible approach, because although the market is predicting another couple of rate rises from the Bank of England, when it comes to fixed rate mortgages and savings, we may well be around the peak.

“Variable rate deals will move with the Bank of England, which is expected to raise rates twice more.

“Tracker mortgages will rise overnight, while standard variable rate mortgages may push up slightly less, and easy access savings will tend to inch up very slowly, because no provider wants to move too far ahead of the others.

“However, fixed rate deals are different.

“These are priced based on what the market expects to happen to interest rates in the future.

“When inflation figures surprised on the upside five weeks ago, it started pricing in a rise to 6.75%.

“Now inflation has surprised on the downside a month later, the market is pricing in a rise to around 6% instead.

“As a result, it’s cheaper for lenders to secure a fixed rate, so they are passing those savings on.”

Mortgages:

“After rising relentlessly from less than 6% in the middle of June, the average two-year fixed-rate mortgage hit 6.86% on Wednesday this week, according to Moneyfacts.

“By Thursday they had inched down to 6.83%.

“Meanwhile Barclays, TSB, HSBC and Nationwide all cut their rates, so we’re expecting average rates to drop from here.

“This isn’t going to usher in an era of super-low rates. For major moves much below 6%, we can expect to have to wait for inflation to fall on a sustained basis and the Bank of England to be weighing up rate cuts – rather than just being likely to put them on hold this autumn.

“However, it will be enough of a shift to make a material difference to remortgagers who were dreading the hunt to find a new deal – and some buyers who had been priced out of the market.

“If you’ve been sitting on a variable rate, waiting for a good time to fix, then with Bank of England rates set to rise twice more, this could be what you’ve been waiting for.

“You will need to be comfortable with watching fixed rates fall further into next year, but you will have the certainty of a fix at a lower rate than we’ve seen for weeks.”

Savings:

“Fixed-rate savings tend to move slower than their mortgage equivalents, so we have seen them creep up very gradually.

“At the end of May, the average one-year fix offered 4.17%, and now it’s offering 5.15%, according to Moneyfacts.

“However, at the most competitive end of the market, we have seen things settle just above 6%.

“There has been far less movement more recently, and market-leading rates offering 6.2% over two years and 6.1% over one year have disappeared.

“These are reasonable signs that we may be reaching the peak.

“Savers have spotted this. Of the new money going into savings accounts on Active Savings, HL’s cash savings platform, in July, 74% of it has gone into fixed rate accounts – this is up from 66% in June.

“More than three quarters of fixes are for a year or less, so savers are capitalising on the generosity of shorter-term fixed rates.

“This trend shows that the rise in fixed rate savings that the Bank of England saw in April and May could well have continued through the summer.”

Helen Morrissey comments on annuities:

“After years of being relegated to bit part status in people’s retirement planning annuities are taking centre stage again with income creeping ever higher.

“According to our latest annuity rate data a 65-year-old with a £100,000 pension can get an income of up to £7,210 per year.

“Apart from a brief period last Autumn when the mini-Budget sent gilt yields soaring you haven’t been able to get incomes like this from an annuity for well over a decade.

“When you compare this to the £4,946 the same person would have got just two years ago you can see why people are taking a closer look.

“Rising interest rates are one factor that feed into annuity rates and it’s true to say they started to shift significantly higher on the back of the Bank of England’s decision to hike rates.

“It’s no certainty that we will see further increases off the back of another boost next week, but it is a strong possibility and with interest rates looking like they will remain elevated for some time we can expect retirees looking for a level of guaranteed income to keep a close eye on the market.”

Kindly shared by Hargreaves Lansdown

Main article photo courtesy of Pixabay