Implications for Mortgage, Savings, and Pensions

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Understanding Bank Rate Effects

Understanding bank rate effects, the Bank of England has once again decided to maintain the base interest rate at 5.25 per cent. Previously, the rate had seen consecutive increases since December 2021, but the Monetary Policy Committee (MPC), the bank’s team of economists responsible for setting the rate, opted to halt these increases in September, and has now done so again.

In today’s decision, the MPC voted 6-3 in favour of keeping the rate at 5.25 per cent, while the three dissenting members advocated for a 0.25 percentage point increase to 5.5 per cent.

The prior rate hikes were implemented to curb persistent inflation, which hit a peak of 11.1 per cent last year. Currently at 6.7 per cent, inflation is projected to decrease in the coming month.

Economists, speaking to RedCardinal, had widely anticipated this pause, with the base rate not expected to rise further in 2023, barring an escalation of the Israel-Hamas conflict drawing in neighbouring countries.

Andrew Bailey, Governor of the Bank of England, remarked, ‘Higher interest rates are effective, and inflation is receding. However, we need to see inflation continue to decrease until it reaches our 2 per cent target. We’ve maintained rates this month, but we’ll closely monitor whether further increases are necessary.’

The Treasury will likely welcome this news, as it grapples with reducing inflation to meet Rishi Sunak’s commitment of halving it to 5.4 per cent by year-end, while also avoiding a recession. This decision will also enable Chancellor Jeremy Hunt to finalise his Autumn Statement scheduled for this month.

Mr Hunt stated, ‘Inflation is declining, wages are rising, and the economy is growing. The UK has displayed greater resilience than anticipated, but sustainable growth remains the best means of delivering prosperity. The Autumn Statement will outline our strategy for enhancing economic growth by unlocking private investment, increasing employment, and fostering a more productive British state.’

Nonetheless, pressure is mounting on the bank to decrease interest rates. Former Tory leader Iain Duncan Smith indicated to RedCardinal on Wednesday that he favoured a rate reduction to avert a recession.

However, Mr Bailey disagreed, stating, ‘It’s premature to consider rate cuts at this stage.’

Shadow Chancellor Rachel Reeves labelled the decision a ‘scathing indictment of 13 years of economic mismanagement.’

‘At the start of the year, Rishi Sunak and Jeremy Hunt pledged to stimulate economic growth. These figures show we are heading in the wrong direction, with forecasts indicating a shift from low growth to no growth, with the burden falling on working people,’ she added.

Understanding Bank Rate Effects

RedCardinal Assesses the Implications of Today’s Decision on Your Finances

Understanding Bank Rate Effects: Economic Implications

The Bank’s Monetary Policy Report delivered discouraging news about the economy. Although it does not predict a recession (defined as two consecutive quarters of negative growth), it anticipates no growth until 2025. The report also notes an uptick in unemployment, reaching 4.2 per cent.

The Bank’s decision on rates has heightened concerns that an already fragile economy. In fact, this has been on the verge of a recession for a year, might now be pushed over the edge. The Bank seems to be of the opinion that this is the only viable path out of high inflation.

Impact on Mortgage Holders

At present, the average two-year fixed rate stands at 6.3 per cent, and the five-year rate at 5.87 per cent, according to data from Moneyfacts, the analytics firm.

Labour has warned that 630,000 homeowners may confront a rise in mortgage costs before the local elections in May next year. This is due to increased borrowing expenses stemming from high interest rates. Analysis, based on figures from the Office for National Statistics, indicates that over 3,400 households will engage in remortgaging each day during the six months between 2 November and 1 May 2024.

Understanding Bank Rate Effects

The Impact of Today’s Decision Varies Depending on the Type of Home Loan

Understanding Bank Rate Effects: Tracker Mortgages

Approximately 8 per cent of customers are on these. Trackers are loans that directly follow the Bank’s base rate, with additional interest. For those on these mortgages, their payments will remain constant, undoubtedly providing relief after a challenging 18 months.

Standard Variable Rate (SVR) Mortgages

Roughly 9 per cent of customers have these mortgages, which do not need to align with the Bank of England’s interest rate. However, they usually tend to do so in practice. A pause suggests it is unlikely they will see an increase.

Fixed Mortgages

Approximately 81 per cent of people possess this type of mortgage, where the interest rate is fixed for a specific period, usually two or five years. As a result, those with this loan will not see any impact on their repayments from today’s interest rate announcement.

However, individuals transitioning from a fixed-rate deal to a new one will likely face significantly higher interest rates. Some may adopt a wait-and-see approach, possibly transitioning to the lender’s SVR (the rate to which they are automatically shifted if they do not remortgage), enabling them to refix when rates drop. Alternatively, they could opt for a tracker.

Nevertheless, this approach comes with risks, given that SVR rates are presently quite high (just under 8 per cent on average). Moreover, the future trajectory of rates remains uncertain, particularly considering the volatile political situation in the Middle East.

Choosing a two-year deal could be a wise decision, despite being slightly more expensive than a five-year option. This is because many anticipate a significant rate decrease by the end of the two-year period. In other words, enabling them to secure a longer fixed rate thereafter.

Understanding Bank Rate Effects: Handling Payment Difficulties

If you find yourself struggling to make payments, it is advisable to communicate with your lender. They may extend your mortgage term or allow you to switch to an interest-only loan for a specific period. This will reduce monthly payments temporarily but will ultimately increase your overall interest payments.

They might also offer a ‘payment holiday,’ temporarily pausing your mortgage payments. This can provide some breathing space to help you regain control of your finances.

Impact on Renters

Renters are indirectly affected by the Bank of England’s base rate, as landlords are likely to raise rents if they have mortgages and costs are escalating. The pause in rate increases could be a slight glimmer of hope as rents reach unprecedented highs. Nonetheless, many landlords will still be remortgaging this year and next, potentially encountering significant increases that they may pass on to renters.

For renters, understanding their rights regarding when a landlord can raise the rent and by what margin is crucial. If they believe the rent hikes are unjustified, they can appeal to a rental tribunal. Here, a judge will assess what qualifies as fair pricing.

Understanding Bank Rate Effects: Peaking of Savings Rates

One of the positive consequences of higher interest rates is increased savings rates. Notable deals include Paragon Bank’s easy access account offering 5.25 per cent and a 6 per cent rate for a one-year fix with FirstSave.

However, experts now suggest reviewing the returns you are earning, as rates have likely reached their peak or will do so soon.

Sarah Coles, a personal finance expert at Hargreaves Lansdown, advises, ‘The best rates tend to come with limited withdrawal options.’

For those planning to secure improved interest rates soon, prompt action is crucial to obtain the best possible deal. Banks are starting to withdraw their leading offers, suspecting that interest rates have reached their peak.

Understanding Bank Rate Effects: Impact on Pension and Annuity Holders

The state pension rose by 10.1 per cent in April 2023, in alignment with inflation. It is expected to increase by 8.5 per cent next April, in line with earnings growth.

Previous interest rate increases have been favourable for individuals obtaining an annuity over the past year. An annuity ensures a regular guaranteed income during retirement.

You can purchase an annuity with some or all of your pension pot. Prior to the sequence of rate increases, the return was around 3 per cent, but now it stands closer to 6 per cent.

As a result, individuals who recently purchased an annuity may observe a doubled return. This results in having double the funds available for spending during retirement. This is in comparison to those who secured an annuity two years ago.

However, with rates remaining static, the surge in annuity returns may come to a halt as well. If you have been procrastinating on committing to an annuity in anticipation of improved rates, now might be the time to make a decision.

Impact on Credit card Holders and Individuals in Debt

A higher base rate spells trouble for borrowers, as more of their funds are allocated to interest payments on loans, mortgages, credit cards, and overdrafts. While maintaining the rate may not be entirely advantageous, it at least suggests a lower likelihood of increased interest payments.

It is essential to ascertain the type of credit card you possess. For instance, borrowing £1,000 on an overdraft for an entire month at 39.9 per cent would cost £33.25. On a credit card with a 21.9 per cent charge, the cost would amount to £18.25. For those who settle their credit card statement balance in full each month, there would be no interest to pay.

Individuals with substantial debts may consider looking into a zero-per-cent balance transfer credit card. This option clears the debt without any interest applied for a set period. However, it remains crucial to remember to repay the balance transfer card before the interest-free period ends. Not doing so could leave you with a substantial bill.

Find out more about what’s happening in the property market in our News column.

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