21 June 2023
If you are covering the upcoming Bank of England interest rate decision and how it could impact personal finance, please see the following comment from Emma Prince, financial planner at Quilter:
"The imminent hike in interest rates by the Bank of England, currently standing at 4.5%, spells a looming crisis for many homeowners and individuals in debt. The anticipated increase is set to drive the average two-year fixed mortgage rate, currently just above 6%, even higher.
Higher rates, expiring deals, and stretched household budgets
"Over the past week, mortgage rates have surged in anticipation of the predicted interest rate peak. This forecast spells disaster for an estimated 1.4 million people on fixed-rate mortgage deals set to expire this year. The inevitable increase in monthly payments will put huge strain on household budgets, reducing disposable income and potentially slowing down spending on goods and services and ultimately increasing the likelihood of the UK falling into recession.
"The looming increase will directly hit those on variable and tracker mortgages. While those on fixed-rate deals may find temporary relief, the steadily rising rates foretell a harsh reality once these deals end. This situation is especially concerning for those homeowners whose ultra-low fixed rate deals are due to end, leaving them to navigate the evolving interest rate environment.
"Those looking to the government to step in to help them in this storm will be left wanting as it is unlikely to intervene due to the fear of worsening inflationary pressures. This seemingly 'cruel to be kind' approach may leave homeowners vulnerable but will hopefully help push inflation down in the long run.
How to deal with the rising cost of debt
"Firms are obligated to help their customers so don’t bury your head in the sand. If you're among those having difficulties, remember that help is available. Don't wait until the situation becomes unbearable, reach out to your lenders as soon as possible.
"Before you reach out to your lender, take some time to work out exactly how much you can afford to pay back. There are budgeting tools and free expert advice available to help you manage your finances.
"Remember, you're not alone, and there are ways to manage your finances during these challenging times. The FCA will continue to act quickly to ensure financial firms help their customers who are facing financial difficulty.
"For those struggling with unsecured debt, the rise in interest rates will also sadly worsen their situation. It's crucial for these individuals to focus on debt management strategies such as budgeting, cutting down on non-essential expenses, and seeking additional income sources. Additionally, maintaining control over credit card payments can prevent the spiral of debt from deepening.
The silver lining of better returns on savings
"While only a small carrot to help soften what is a lot of stick customers are facing is the prospect of higher interest rates on savings. However, at present banks and building societies have ramped up rates on mortgage swiftly but been ponderous when it comes to increasing their rates on cash. The Commons Treasury Committee is advocating for banks to offer better interest rates to loyal customers. Lenders do not want a situation where hundreds of thousands of people fall into arrears because they do not want to have to repose homes and get left with a huge portfolio of bricks and mortar that they struggle to sell. Hopefully this will force lenders to offer better rates in the short term."
