In its latest Monetary Policy Committee meeting, the Bank of England again voted to keep interest rates steady at 5.2pc, however, forecasters predict an eventual shift is on the horizon.
Savers and homeowners should therefore prepare for the likelihood of falling interest rates in coming months.
Money markets imply there is a more than 50pc chance that policymakers will reduce borrowing costs next month for the first time since beginning its rate-rising campaign at the end of 2021.
If it does not happen then, traders have priced in that the first cut will have happened by the following meeting in August. The general mood among investors is that the rate will stand at 4.75pc come the end of the year
Mortgage-holders and first-time buyers have long held out for a reprieve as the current interest rate cycle has caused mayhem in the property market over the past two years.
Savers, meanwhile, are hoping the Bank Rate reductions come later rather than sooner.
David Murray, of investment firm Abrdn, said: “The contradictory situation can feel overwhelming. On the one hand people want to take advantage of better returns on savings, but on the other, need to reserve cash for higher monthly mortgage payments.”
Here, Telegraph Money explains what the current Bank Rate predictions mean for your mortgage, savings, pension and investments.
First-time buyers and homeowners remortgaging
While those already on a fixed-rate mortgage will be unaffected by a Bank Rate decision, the 1.5 million people needing to remortgage this year will almost certainly see their payments go up, despite falling rates, because of how cheap home loans were two years ago.
Currently the average two-year fixed rate is 5.93pc and the five-year fix is 5.51pc, according to Moneyfacts, though the best deals will be cheaper.
Rates have edged higher in the past two months, despite the Bank Rate remaining steady. At the start of February, the average two-year fix was 5.56pc and the five-year fix was 5.18pc.
Alice Haine, of wealth manager Bestinvest, said: “Mortgage rates retreated in the first few weeks of 2024 as hopes of imminent rate cuts heightened, but they have edged back up since then amid market revisions over the timing and number of rate cuts this year.”
Brokers believe that rates will fall over the coming year, as the prospect of a Bank Rate reduction looms, but progress will likely be slow.
Paresh Raja, of specialist lender Market Financial Solutions, said: “The reality has sunk in that rates will not get back to the low levels many borrowers had become accustomed to throughout the 2010s.
“A Bank Rate above 4pc is highly likely for the next 12 to 18 months, and the sense of inertia is steadily fading away as buyers and investors decide to re-enter the market.”
Mortgages
Any Bank Rate move usually has an impact on those on a variable-rate deal.
According to UK Finance, the banking trade body, there are 643,000 homeowners with tracker mortgages and 679,000 on a standard variable rate.
Due to continual Bank Rate rises between 2021 and August 2023, and its remaining the same ever since, those who gambled on tracker mortgages have long been waiting for a reprieve.
Tracker mortgages are tied to the Bank Rate, so if a loan with the average rate went up by 0.5 percentage points, it would cost a homeowner £83 extra per month, assuming they had a £300,000 loan to be paid back over 30 years.
But without a change to the Bank Rate, these loans stay at their current interest rate.
The average two-year tracker rate is 6.12pc, according to Moneyfacts. The average standard variable rate (SVR) as of May 1 2024 is 8.18pc.
Lenders are free to change their SVR whenever they wish, but are unlikely to make changes when the Bank Rate is frozen.
Borrowers are automatically put onto their lender’s default SVR if they do not remortgage on to a new deal when their original fixed-rate or tracker deal comes to an end.
Savings
While mortgage rates have been edging higher over the same couple of months, the same cannot be said for savings rates, which peaked last year.
The average easy-access saving rate is 3.12pc, according to Moneyfacts. A saver with £10,000 in an average easy-access account would earn around £316 in interest over the next 12 months. But if banks offered the full Bank Rate of 5.25pc, they would earn £538.
Banks have been slowly reducing the rates on offer in easy-access space, as they start to prepare for a base rate cut later this year.
Savers can get slightly higher rates in an easy-access cash Isa account, which pays 3.34pc on average. Returns on Isas are tax-free, and up to £20,000 a year can be spread across multiple accounts.
Rachel Springall, of Moneyfacts, said: “It is wise for consumers to take advantage of their Isa allowance, particularly if they are a higher rate taxpayer, as the current best rates could see them breach their personal savings allowance.”
Savers will earn far more on interest with a fixed-rate account. The best rate on a bond that is fixed for up to one year right now is 5.2pc, from Al Rayan Bank, meaning savers would earn £532 in interest on a £10,000 cash deposit.
Adam Thrower, head of savings at Shawbrook, says the bank has seen an six-fold increase in savers choosing to fix their Isas for three-to-five years, as customers look to make the most of the high interest environment.
“While offering slightly less flexibility than easy-access accounts, they provide guaranteed returns for a set period, which may be more attractive for those who are for income planning in the face of potential rate volatility,” he said.
Pensions
Most savers should not make changes to their pension based on the Bank Rate, as the further you are away from retirement the more time you have to recover any losses in the stock market.
However, the end of this rising interest rate cycle means the annuity market will cool down.
Annuities exchange a lump sum for a guaranteed income in retirement. Before interest rates started rising, they had long been out of fashion as they offered very low payout rates. However, in the past year they have risen to heights not seen since the 2000s.
At today’s rates, a 65-year-old with £100,000 can buy an annuity paying £7,030 a year, according to stockbrokers Hargreaves Lansdown.
Helen Morrissey, of Hargreaves Lansdown, said: “Stability is good news for would-be annuitants who may have sat on their hands while interest rates rose in the hope of securing a better income later on.
“The interesting thing will be what happens in the coming months. The prospect of an interest rate cut is looming large, and we could see more people looking to take a leap and secure their rate now before interest rates start to weigh on annuity incomes.”
Investments
The FTSE 100 has spiked to a fresh record high amid optimism that the Bank of England will begin cutting interest rates this summer.
Though, a higher interest rate can have an adverse effect on investment strategies focused on growth stocks, as many businesses – especially in the technology sector – have historically fuelled their growth through the use of cheap debt. The higher cost of borrowing can make this more difficult.
However, an investment portfolio that is invested across the entire global stock market is likely to be influenced more heavily by the American central bank’s decisions rather than those made on Threadneedle Street. Even the companies that make up the FTSE 100, London’s benchmark index, derive most of their revenues from overseas.
The US Federal Reserve has recently changed its rhetoric from “higher for longer” interest rates, to accepting that they have now “peaked”. Market-watchers now expect that the Fed could start to cut interest rates before the autumn, yet others do not anticipate cuts until 2025.
The Fed opted last week to hold interest rates steady for a sixth meeting in a row at their 23-year highs of 5.25pc to 5.5pc.
Chairman Jerome Powell had warned that it is still too early to declare victory against stubborn inflation after “a lack of further progress” in a blow to hopes of imminent rate cuts.
Meanwhile, the European Central Bank has already signalled it will reduce borrowing costs on June 6.
Laith Khalaf, of AJ Bell, said: “There’s a great deal of speculation as to which of the big three western central banks is going to blink first and cut interest rates.”
Disclaimer: The copyright of this article belongs to the original author. Reposting this article is solely for the purpose of information dissemination and does not constitute any investment advice. If there is any infringement, please contact us immediately. We will make corrections or deletions as necessary. Thank you.
