What bumper rate rise means for you: mortgages, savings and annuities

Experts at Hargreaves Lansdown comment on the bumper rate rise by the Bank of England and discusses what it means for mortgages, savings and annuities.

Key points of discussion from announcement:

• • The Bank of England has hiked interest rates 0.5 percentage points to 5%
  • What it means for mortgages
  • The impact on savings
  • What next for annuities?

What it means for mortgages: Sarah Coles, head of personal finance:

“Yesterday’s shock rises in core inflation drove away any last vestiges of doubt about the need for more rate rises, and the Bank of England has delivered.

“A punishing 0.5 percentage point hike to 5% signals that it’s prepared to do whatever it takes to squeeze inflation out of the system.

“It’s a horrible blow for millions of mortgage holders.

“Tracker rates will rise with every Bank of England hike, and there’s a strong chance that most SVRs will increase too.

“Plenty of people whose fixed deals came to an end in the past six months or so have switched onto a variable rate mortgage in the hope that fixed rates would fall.

“The fact that they’ve stayed so alarmingly high means this is proving a very expensive strategy.

“Those on a fixed rate mortgage are protected for now, but the threat of a remortgage will be keeping millions of people up at night.

“Over the past month, new fixed rate deals have climbed alarmingly.

“This morning’s Moneyfacts figures showed the average 2-year fixed rate deal hit almost 6.2%, while the average five-year deal, pushed over 5.8%. It’s not quite at the nightmarish levels we saw in the aftermath of the mini budget – but it’s not far off.

“The problem isn’t just today’s hike, it’s the fact the market is worried that inflation is so entrenched that we’re going to need even more rises in the coming months.

“It’s currently pricing in five more hikes, to just under 6% in March 2024.

“Higher rate expectations are being priced into fixed rate mortgages, which continue to ramp up.

“The fact that the Bank has delivered such a big hike today will cement the market’s conviction that more rises are on the cards, and that’s going to filter through into even more painful rises in mortgage rates.

“All of this is a nightmare for anyone going through a remortgage.

“Current rates are streets ahead of what most remortgagers are currently paying – because most fixed for less than 2%.

“Someone moving a 25-year £200,000 mortgage from 2% to 6.2% could find their monthly payment rising around £465 to £1,313.

“Our research shows that more than nine in ten people would run into financial trouble with a rise of that size.

“There is some hope though, because while we are very likely to see more rate rises, by pricing in so many, the market may be overdoing things.

“It takes time for rate changes to have an impact on inflation – and at a time when so much of the mortgage market is fixed it’s may well take longer than had been expected.

“Such a big rise today may well provide such a shock to the system that inflation could start to retreat without us needing quite so many hikes.

“In the interim, if rates are still horribly high when you need to remortgage, it’s worth talking to your lender, because the FCA has issued new guidance encouraging them to be more flexible with people facing a mortgage crunch.

“It may be possible, for example, to extend the term of your mortgage for a while, in order to lower the monthly payments, without going through a full affordability check.

“You could also consider moving to interest-only payments on a temporary basis.

“There will be an affordability test, and the FCA will want proof you are making plans for how to repay the capital.

“However, your plan may simply be to revert to a repayment mortgage in the near future, so you can make a temporary change without having to suddenly find the cash for a repayment vehicle too.”

What it means for savings: Sarah Coles, head of personal finance:

”Terrible news for borrowers has been much better news for savers.

“Some of this rise will have been priced in, but a higher-than-expected hike is likely to mean we see rates rise a little from here.

“We’ve already seen some particularly strong rates emerge ahead of the announcement – including one-year fixed rates of up to 5.7% and longer-term fixed rate bonds of up to 5.67%.

“You currently get more for fixing for three years than for longer.

“This is reflective of the mixed economic outlook, and the expectation that rates will rise for the short term but come down again in the future.

“It may be tempting to fix for a shorter period in order to snag a better rate but think carefully when you actually need this money.

“If you don’t want to spend it for at least five years, you might find savings rates are much lower when we get 12 months down the line, so fixing for one year may leave you earning less for the next four.

“It makes sense to start with the rate you want to fix for, rather than being swayed by what’s happening to rates right now.

“It may also feel tempting to wait and see before fixing – in case rates continue to rise. You may well be rewarded in the coming days.

“However, if the market has over-estimated the number of rises, we need, then any sign of weakening inflation or trouble in the economy may depress rate expectations, and push savings rates down.

“It means it’s worth considering locking in higher rates sooner rather than later.”

What next for annuities? – Helen Morrissey, head of retirement analysis:

“One of the few benefits of soaring interest rates is the revival in fortunes of the annuity market.

“Often criticised as providing poor value for money, annuity incomes have increased rapidly – up well over 40% in the last two years alone.

“Interest rates are just one factor feeding into annuity rates so we cannot say for certain that we will see further increases as a result of today’s hike – but there is a strong likelihood we will see incomes continue to climb in the coming weeks.

“As inflation proves exceptionally sticky, we can expect more interest rate increases to come in the coming months so we could see them surge even higher throughout the year.

“If you need a guaranteed income in retirement, then annuities should always be a consideration.

“If you are concerned about missing out on future increases by tying into an annuity today, then you could consider annuitizing in slices throughout retirement rather than annuitizing your whole pension pot at once.

“This means you can leave the remainder of your fund invested where it can continue to grow, and you potentially benefit from higher annuity rates later.”

Kindly shared by Hargreaves Lansdown

Main article photo courtesy of Pixabay