Q. Will savings rates get better? Or should I lock my cash away now in a fixed rate account?

A. Calling the top of the savings market isn’t straightforward, but it’s looking highly likely that for we’re there.

The Bank of England held rates last week so fixed savings rates may well have peaked. When banks are setting fixed rates, they’re not only interested in what happens a month or two down the line, they look at what’s likely to happen to interest rates during the entire fixed period.

Back in June, when inflation was surprising on the upside, they started to think that rates would have to rise further than they’d predicted and might stay there for longer than expected too.

As a result, savings rates climbed. More recently, as inflation has fallen, they’re pricing in fewer rises, so savings rates have eased off very slightly.

The very best fixed rates over two and three years are down a little from their July levels, and over longer periods they haven’t moved for a while. It looks like they’re settling around the 6% level for now. Even the one-year fixed-rate market may have reached the top.

It means that anyone who is holding off for a good time to fix their rates should get their skates on – especially if their cash is earning very little elsewhere in the interim.

Sarah Coles has been an analyst with Hargreaves Lansdown for the past five years, after spending 14 years as a financial journalist writing for publications ranging from Bloomberg to AOL Money. 

Her areas of expertise include savings and financial planning – covering everything from tax to borrowing, spending and the housing market. She is also co-presenter of HL's ‘Switch Your Money On' podcast.

She is passionate about encouraging people to get to grips with every aspect of their finances, not because finance is inherently fascinating to everyone, but so they have enough money for the things that really matter to them in life.

Photo Credits: Pexels

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Since the 2020 global pandemic, the UK has grappled with a very challenging economic landscape.

Inflation has surged to unprecedented levels of over 10%, causing the cost of living to soar and placing immense pressure on households nationwide.

As if this weren’t enough, the response from monetary authorities has been increases in interest rates, a move aimed at taming inflation but one that comes with its own set of repercussions.

In this blog post, we delve into the consequences of rising interest rates on UK households and examine how this measure has inadvertently pushed many into debt.

Before we delve into the impact of rising interest rates, it’s crucial to understand the context of the soaring inflation that has sparked this chain of events.

A combination of global supply chain disruptions, increased energy costs, and pent-up demand following pandemic-related restrictions has led to a surge in consumer prices. As a result, families across the UK have encountered higher prices for essentials such as food, fuel, and housing.

The Bank of England resorted to increasing interest rates to curb inflation and stabilise the economy. While this move aimed to rein in spending and borrowing, it inadvertently caused a domino effect that reverberates through households struggling to make ends meet.

Mortgages, loans, and credit card balances are all linked to the interest rate set by the central bank. As this rate climbed, so did the monthly payments for these financial commitments.

The rising interest rates translated into increased financial strain for many households. Mortgages, often the most significant financial commitment for families, have become more expensive to service.

Those on variable-rate mortgages deal with higher monthly payments, potentially stretching their budgets to the breaking point. Even fixed-rate mortgages are not immune, as prospective homeowners face higher borrowing costs when entering the property market.

Consumer loans, including personal and credit card debt, have also taken a hit as interest rates climb.

As the cost of servicing these debts increases, families are left with less disposable income to allocate towards other necessities, prompting some to rely on credit to cover daily expenses, thereby perpetuating a cycle of debt that becomes increasingly difficult to break free from.

While raising interest rates was intended to encourage saving and discourage spending, the reality was often more complex. Although savings accounts may offer slightly better returns, they still struggle to outpace the rising inflation rate.

This means that the purchasing power of these savings is eroded over time, leading to a situation where individuals may feel compelled to dip into their savings to maintain their standard of living.

The current economic landscape in the UK is undoubtedly challenging, with surging inflation and rising interest rates placing immense strain on households.

Addressing this issue requires a multifaceted approach that combines responsible fiscal policies, targeted support for vulnerable households, and initiatives to encourage economic growth.

By recognising the interconnected nature of these challenges, the UK can hopefully work towards achieving a more balanced and stable economic environment that safeguards the financial well-being of all its residents.

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If you’re one of the 1.8 million borrowers whose fixed rate mortgage is up for renewal this year, you may be in for a shock.

Mortgage rates have soared over the past 12 months, meaning you’ll probably have to pay more when you remortgage.

Many borrowers are locking into longer-term fixes in case rates rise even further.

However, with the outlook for interest rates uncertain, that may not necessarily be the best idea.

To help you decide what to do next, Mouthy Money weighs up your options.

Why have mortgage rates risen by so much?

But first, why have mortgage rates risen so much?

In short, because the Bank of England (BoE) has hiked Bank Rate – the UK’s most important interest rate – to a 14-year high of 4% over the past 15 months.

That’s because the price of goods and services – otherwise known as inflation – has soared to a near 40-year high. There are a number of reasons for this, including the fallout from Covid, supply issues and the war in Ukraine.

The BoE hopes that by hiking borrowing costs people will spend less and save more, and thus prices will fall. That’s the theory, at least.

But that policy, of course, has a negative knock-on effect on mortgage borrowers.

When Bank Rate is rising, it tends to push up swap rates, which banks use to price their fixed-rate mortgages.

And so when swap rates rise, mortgage rates tend to as well. This is what we have seen over the past year.

According to data firm Moneyfactscompare.co.uk, the average five-year fixed rate has rocketed from 2.88% to 5% in the past 12 months.

On a £200,000 25-year mortgage that works out at an extra £234 a month. That’s a lot of money for people to find in the middle of a cost-of-living crisis.

However, there is a silver lining.

Rachel Springall, finance expert at Moneyfactscompare.co.uk, points out that rates have actually rolled back in recent months.

The firm’s data shows the average five-year fixed rate has fallen more than 0.6 percentage points since January. Two-year deals have fallen by 0.47 percentage points over the same period.

Springall says: “Mortgage pricing fluctuates for a few reasons, but thankfully fixed rates have been coming down over recent weeks, which is good news for borrowers looking for a new deal.”

If rates are falling, does that mean they will continue to fall?

Without a crystal ball, it’s impossible to say.

Markets – shorthand for professional investors – predict the BoE will stop increasing Bank Rate when it hits 4.5%. That is just 0.5 percentage points higher than now.

Those same observers believe the BoE may even start cutting rates at some point in 2023 or 2024.

However, investors are constantly revising these estimates based on what is happening to inflation and the wider economy.

For example, if inflation remains high, the BoE might decide to hike rates higher than expected.

On the other hand, if inflation falls quickly or the economy starts to struggle, the BoE may decide it has some scope to lower interest rates.

Either way, it will probably have a knock-on effect on the price of mortgages.

So what should I do now?

Typically, you can apply for a new mortgage once you have six months or less remaining on your existing deal.

If that’s you, now is the time to start shopping around or to get in touch with your mortgage broker.

A good broker will scour the market looking for lenders offering the best deals. But it’s also worth checking what your existing lender is willing to offer.

Sometimes, lenders offer what are called ‘product transfers’ or ‘rate switches’ to their existing customers. These have their benefits and drawbacks.

On the one hand, the fees on product transfers tend to be much lower, potentially saving you money. There is also far less paperwork and, often, you don’t need to pass another credit check. That’s handy if your financial situation has changed since you last took out a loan.

However, your current lender may not offer the best rates, meaning you could be missing out on a better deal elsewhere.

OK, got it. Should I go for a fixed rate then?

That’s a difficult question to answer as everyone’s circumstances are different.

Fixed rates are best suited for borrowers who want payment certainty, Hollingworth says.

That’s because the monthly repayment stays the same for the duration of the fixed rate period, regardless of what the BoE does with interest rates.

So, for example, if you take out a two-year fix, your monthly repayment will be fixed for two years. Likewise, if you take out a five-year fix, they will be fixed for five.

However, they often come with steep penalties if you want to break the deal early.

For example, let’s say you’re in the first year of a five-year fixed rate and you see a better deal .

To take advantage of that better deal, you’ll first have to break free of the five-year fixed rate you’re on. To do that, you’ll have to pay the lender’s so-called early repayment charge (ERC).

ERCs can be as much as 5% on a five-year fixed rate. Or, in other words, £10,000 on a £200,000 loan.

David Hollingworth, of mortgage broker L&C Mortgages, says: “Fixed rates give peace of mind which is something that households will be craving during such a volatile period of rising costs and high inflation. 

“Thankfully rates have dropped substantially since they rocketed after the mini Budget although they remain substantially higher than the ultra-low rates that borrowers have enjoyed in recent years. 

“That may mean that locking into a fixed rate is a useful way to ensure that the mortgage payment will not rise and fall with interest rates and give some budgeting security when other costs are fluctuating.”

The next question is: if you’ve got your heart set on a fixed-rate, how long should you fix for?

The answer to that depends on what you think will happen to interest rates. If you think interest rates will stay high, you might want to opt for a five-year fixed rate.

However, if you think interest rates will fall in the coming years, a two-year fixed rate may suit. That way you’re not locked into a more expensive deal long-term when rates are falling

It’s worth noting, though, that two-year deals are currently more expensive, typically, than five-year fixed rates.

Whereas the average five-year fixed-rate is currently 5%, the average two-year fixed rate is 5.32%, according to Moneyfactscompare.co.uk.

However, remember, those are average figures. You can get much better deals by shopping around.

In fact, someone with a 40% deposit can currently get a five-year fixed-rate from first direct for 3.99%. That works out at £1,054 a month on a £200,000 loan over 25 years.

Hollingworth says: “Unusually we have a situation where medium to longer-term fixed rates are lower than shorter-term rates. That’s because markets expect that the recent in spike in interest rates may stabilise over time, But with lower rates and an uncertain back drop, many borrowers will like the look of the lower five-year rates and the stability to ride out any further ups and downs.”

Ten-year fixed rates provide even more long-term certainty. However, Hollingworth says these products are not suitable for everybody.

He says: “Ten-year fixed rates can limit flexibility for the borrower if they need to review the mortgage and some will still be hoping that recent rapid rises in interest rates will ease back further over time. There’s no guarantee of that of course and longer-term fixed rates can be ideal for those that want to know exactly where they stand.

“Shorter-term fixed rates, on the other hand, are currently higher but some borrowers may feel that this is a temporary state of affairs and that interest rates may need to drop back once inflation eases.   

“If that transpires and interest rates fall then it could leave borrowers looking at a more competitive landscape when they exit a shorter-term fix. 

“However, there’s absolutely nothing to say that things won’t go against them and we’ve seen how rapidly market conditions and sentiment can shift.  It’s therefore worth thinking ahead in case rates don’t move as hoped.”

Another popular option, of course, is a tracker mortgage. Unlike with a fixed rate, tracker mortgages move in line with interest rates.

For example, if the BoE hiked interest rates by 0.5 percentage points tomorrow, your rate would jump by the same amount.

Currently, Halifax offers one of the best two-year trackers at 4.23% for those with a 40% deposit. That works out at £1,081 a month on a £200,000 loan over 25 years.

However, if the BoE raised rates by 0.5 percentage points, you’d end up paying £57 more a month.

Conversely, if the BoE cut rates by 0.5 percentage points, your monthly repayments would fall by £55 a month.

While trackers provide less certainty than a fixed rate, they are usually much more flexible.

For example, unlike fixed-rates, trackers often don’t come with penalties for ending the deal early.

Therefore, a tracker may be an option if you value flexibility and plan to ‘wait and see’ if the BoE reduces interest rates, as expected.

However, as Hollingworth points out, that’s a risk as there is no guarantee that will happen: “A variable or tracker deal does not give the protection against further rate hikes. 

“If rates don’t come back down then the tracker could prove more expensive and borrowers need to have the ability to deal with the potential for higher payments. 

“It therefore makes sense to opt for the deal that works best for you and some will prioritise peace of mind at such an uncertain and volatile point in time.”

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