02 November 2023
If you are covering the Bank of England’s latest interest rate decision and the impact it will have on personal finance, please see the following comment from Chris Flower, chartered financial planner at Quilter:
Mortgages and property market:
“For current and prospective homeowners, a further hold on interest rates will offer somewhat of a mixed bag. Those on variable rate mortgages will not see an immediate increase in their monthly payments, and the stability will provide further reprieve for borrowers – particularly those who may have been concerned about rising costs. Data from the Bank of England earlier this week showed that transaction levels are currently so low that mortgage repayments outweighed the value of new mortgage debt taken out. The housing market is currently in a deep freeze and while a hold in rates is certainly not bad news, it’s probably not going to thaw it out any time soon.
“However, if rate stability helps people begin to feel more financially secure, then house prices may drop less quickly than first feared, as more competition helps to prop up prices.
“For those looking to remortgage or take out a new mortgage, lenders appear to be remaining very strict with their criteria. Though fixed rates have lowered slightly, new borrowers or those looking to switch may not yet see significant reductions, but things are beginning to move in the right direction. After all, lenders are commercial entities which compete for custom, so we may see price wars which could help to push rates down further in the coming months.”
Savings:
“The higher interest rates we’ve grown accustomed to have helped grow people’s cash savings, but a further hold in rates while inflation remains elevated will see the value of these savings eroded rapidly in real terms. CPI inflation sits at 6.7%, and if your bank is only paying a savings interest rate of 5.25% in line with the BoE’s base rate then you will be making a significant real terms loss of 1.45%. This can make it considerably more difficult to reach your financial goals.
“To boost savings, people may need to consider saving more or investing their money across different assets to seek out a higher return. The stock market has had a difficult period, but historically investing has provided inflation-beating returns over the longer term.”
Pensions:
“If someone holds a significant level of cash in their pension, this further hold in interest rates will do little to help them as their level of growth will stagnate, while also remaining a long way from beating inflation.
“The recent rise in interest rates has also had a positive effect on annuity rates, which are closely linked to government bond yields. Higher interest rates generally lead to higher bond yields, which in turn leads to better annuity rates. For retirees looking to purchase an annuity, as interest rates level off this also may mean the level of income they can secure for their retirement also levels off too.
“If individuals continue to have to meet the higher servicing costs of mortgages, loans and other debts, this may limit the amount they can afford to set aside for further pension contributions, impeding their opportunity to give their pension income a boost or even delaying the age they can afford to retire.”
Credit and debt:
“Individuals with outstanding debts with variable interest rates, such as credit cards or overdrafts, or those looking to take on new fixed rate loans will continue to suffer as interest rates are held higher for longer, as the costs of servicing these debts will remain at their elevated levels for longer too. Banks have been quick to pass rate increases on in this instance, so those in debt have seen their costs rise rapidly and it looks unlikely that they will have any relief from this for some time yet.
“To counter the increased cost of servicing debt, it is vital to prioritise paying down high-interest debt first and explore options for consolidating or refinancing loans to secure lower interest rates.”
