The cycle of rate rises may have come to an end.
The Monetary committee of the Bank of England surprised many observers on Thursday. They resisted pressures to make another hike to the bank’s base lending rate – which sets the interest that the Bank of England charges commercial banks to borrow from it.
It remains at 5.25%. It seems (and is) painfully high after more than a decade of low rates – but there are several reasons why the decision to fix the rate is good news for almost everyone.
1. We may have seen the last rate hike
Earlier this summer, markets expected interest rates to peak at 6 %. This was already starting to appear less likely, based on hints dropped by key figures at the bank, and the fact that inflation, although still with us, is starting to fall.
It was this news that seems to have prompted the decision not to hike the rate.
Current inflation figures of 6.7% released on Wednesday may still be a long way from the 2% target, but they suggest that the Bank’s strong medicine seems to be working at last.
The fact that the Bank has not prescribed another dose is something to celebrate.
2. The economy has had a shot in the arm
The economy depends on borrowing. Businesses borrow to buy equipment and raw materials, and to invest in the future. The trouble with putting up interest rates to tackle inflation is that it makes borrowing more expensive for businesses as well as individuals. The economy shrinks as a result.
By not hiking the rate, the Bank has started to steer the economy away from decline, making recession less likely and brightening the prospects for UK plc, businesses and individuals alike.
3. Some mortgages might go down
The base rate has a major impact on the cost of mortgages.
Higher interest rates mean mortgage rates increasing. The monthly mortgage repayments for an average-priced home have gone up by £216 – a 23% increase – in the last year according to the property website Zoopla.
There should be no increases for borrowers this month.
If you’re on a fixed deal, your costs will stay the same until you reach the end of your term. Your costs will stay the same until you reach the end of your term at which point you can look to remortgage. But rates for fixed deals are priced according to the predictions lenders make about the future. If rates are no longer heading up, current deals could look expensive in a year or two.
It could be time to look at remortgaging.
Lenders who expected rates to hit 6% this year priced their deals accordingly. With higher Bank rates now looking less likely, the rates they are asking for a home loan are falling a little. There is also competition for borrowers, which means that some lenders are cutting the costs even more.
With the base rate near or at its peak, it may be worth considering a tracker deal. Payments will go up or down in line with base rate movements, but if the base rate really is at its peak, it could mean savings in the near future. If it isn’t, some tracker deals do not have early repayment charges so they give you the flexibility to switch to a fixed rate if you need to.
At Continuum we keep our finger very firmly on the pulse of the mortgage market. We know the deals from all the UK providers, and we can help you find the one that is best for you.
4. Annuities may be a good buy
While the recent rise in interest rates has had a negative effect on mortgage holders, it had a positive effect on annuity rates.
Annuities, which give you set pension incomes for life, can be bought with a pensions savings pot. They have been unpopular in the past decade, but you tend to get a higher income with your savings as gilt yields – essentially interest on government lending – go up.
Broadly speaking, these increase as interest rates do, and so higher rates means better returns if you want to buy an annuity. The era of low interest and paltry returns from annuities seems over. Right now, annuity rates could possibly have plateaued, if not peaked – making it a good time to buy.
For those who want a guaranteed income from their pension savings, an annuity could be worth considering. But even though they are looking better value, an annuity may still not be the best option for everyone.
Drawdown, which lets you take an income from your pension pot while leaving the rest invested may be a better choice if you need a more flexible approach to retirement funding.
At Continuum we know how to make your pension savings work harder, and can help you find the pension strategy that is best for you. For many, the best option will be a combination of an annuity and drawdown – where you pull money from your pension pot. We can show you exactly what the figures would be for all the options.
5. Savings rates may be peaking
Now that interest rates are no longer on the floor, saving may be rewarding again.
Banks can charge more for lending out the money. This should mean that they will pay you more for the money you lend them, in the form of cash deposited into your savings account.
The higher the base rate goes, the higher savings rates should go. But ‘should’ might not always mean ‘will’, and it pays to look at where your cash is stashed.
Several major banks have come under fire in recent months for not passing increases on to customers, and may be upping their game (and the rates they pay) accordingly.
The best easy-access savings accounts are currently paying around 5% returns but, if you’re willing to lock your cash away for a year or more, you may get more than 6%.
Variable rate accounts tend to react to base rate changes as they happen, but fixed-term accounts are usually priced with the future expectation of the base rate the market believes will be coming.
This could suggest that the savings market may have peaked, or be close to doing so. It could be a good time to review your savings, making sure you have them in the most rewarding account – and acting now while there are still some attractive fixed deals around.
At Continuum we know the savings market, and we can help you find the account that makes your money work its hardest for you.
6. Expert help is at hand
Any decision from the Bank of England base rate can affect your finances. If rates are not going up, the calculations you make as part of your financial planning will have to be looked at again.
At Continuum we can help you with those calculations, looking at every aspect of your finances, from mortgages to savings, investment and retirement, and help you build a strategy designed to leave you better off.
We can help find the products that offer the best value to make that strategy work – and because we are independent, we can focus solely on your interests.
To make the most of the good news, call us today.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice, you should seek independent financial advice before embarking on any course of action.
The Financial Conduct Authority does not regulate deposit accounts.
Your home may be repossessed if you do not keep up repayments on your mortgage.
A pension is a long-term investment; the fund value can go down as well as up and this can impact the level of pension benefits available.