The Bank of England kept interest rates on hold on Thursday – to the relief of many homeowners and would-be buyers.
So what does this mean for your finances, and what are experts advising borrowers and others to do?
Have interest rates peaked?
It’s a good question, and of course no one knows for sure. There are two more meetings of the Bank of England’s monetary policy committee scheduled to take place before the end of the year (on 2 November and 14 December), and a lot will hinge on what happens with inflation between now and then.
That said, many economists and commentators believe rates have probably reached their peak for now.
“With surveys pointing to a further increase in labour market slack, a slight slowdown in wage growth and lower inflation by year-end, the case for hiking again likely won’t be stronger in November or December than today. Accordingly, we now think that 5.25% will be the peak level of Bank rate in this hiking cycle,” said Samuel Tombs, the chief UK economist at Pantheon Macroeconomics.
Paul Dales, the chief UK economist at Capital Economics, said Thursday’s decision probably meant rates were already at their peak. He said he thought rates would stay at 5.25% for longer than many anticipated and that when they were cut, in late 2024, they would “then be reduced further and faster than widely expected”.
On the money markets, interest rate swaps trading suggested just a 30% chance that the Bank would raise interest rates by a quarter of a percentage point to 5.5% at its next meeting in November.
So is it good news for existing mortgage holders?
Thursday’s no-change announcement will have left the holders of the approximately 2m variable rate mortgages breathing a sigh of relief. Their monthly bills had been climbing relentlessly since the end of 2021 when the Bank first started raising rates.
Of that total, a little more than 1.3m are residential mortgages (the rest are buy-to-let loans). Roughly half of these are either base rate tracker loans or discounted-rate deals, while the other half are mortgages where the borrower is paying the lender’s standard variable rate (SVR).
The average SVR is now 8.09%, which is the highest since the data provider Moneyfacts started recording the figure in 2007. In September 2021, the average was 4.41%. Virgin Money’s SVR will be 9.49% from Sunday 1 October. Experts say that most people on their lender’s SVR should switch to something cheaper.
Almost 7m UK residential mortgages are fixed-rate loans. Borrowers with a fixed-rate deal are insulated from rising rates until their deals expire.
What’s happening with new mortgages?
The last year has been a rollercoaster for anyone looking for a new fixed-rate mortgage, whether it is to buy their first property or replace a deal that is coming to an end.
There are about 800,000 homeowners with fixed-rate deals ending in the second half of 2023, while a further 1.6 million have mortgages due to expire in 2024, according to the banking body UK Finance.
Mortgage costs had been ratcheting up for months, but since the second half of July, UK lenders have been reducing their rates on new deals. Some brokers have said a full-scale price war is under way.
During the last few days, fixed-rate mortgages priced at below 5% have gone on sale for the first time since June, with NatWest, Yorkshire building society and Virgin Money among those launching five-year deals at or close to 4.99%.
But despite these price cuts, households remortgaging now are facing hefty payment increases. A buyer who two years ago took out a £200,000 2% fixed-rate, 25-year mortgage has been paying £848 a month. Even if they move to a 4.99% five-year fix, assuming they are eligible, their monthly payments will jump by nearly £300 to £1,141 (and this assumes the term and remaining debt have come down a little since then).
So what should people do?
Many people will be wondering whether they should go for a fix, or take out a tracker or discounted-rate deal.
“Many borrowers are opting for shorter-term fixes or base-rate trackers with no [early redemption] penalties, in the hope that they can fix for longer once rates become more palatable,” said Mark Harris, the chief executive of mortgage broker SPF Private Clients.
Most brokers believe that when it comes to fixed rates, there could be plenty more price cuts to come. “We expect pricing to improve further over coming weeks, and numerous sub-5% five-year fixes to come to the market,” said Harris.
He added: “Borrowers due to come off cheap fixes still face a payment shock, so it is important to plan ahead as much as possible and act now. Rates can be booked up to six months before you need them, so speak to a whole-of-market broker about what’s available. If, when you come to remortgage, rates are cheaper, borrowers can choose another deal.”
Brokers report that some people have been opting for a tracker with no lock in early redemption charges on the assumption that rates have probably peaked and the next move will be downwards.
How are savers faring?
Some will be disappointed that they didn’t get yet another interest rate rise, but savers haven’t been doing too badly of late.
Amid speculation that interest rates may have peaked, Anna Bowes at the website Savings Champion has suggested that, for those who can afford to, now may be the time to “fill your boots” and “take advantage of the best rates we’ve seen for 15 years”.
A number of banks and institutions – including the UK government’s savings bank, NS&I – are offering accounts paying 6% or more for those willing and able to tie up some cash for one year.
NS&I’s new issues of its one-year fixed-rate guaranteed growth bonds and guaranteed income bonds paying 6.2% interest are still available.
NatWest said this week that the number of customers opening fixed-rate savings accounts has “rocketed”. It has upped the interest rate on its one-year fixed account to 5.56%, though for higher balances (above £100,000) this increases to 5.6%.
On the instant/easy access front, there are accounts from the likes of Leeds Building Society and Shawbrook Bank paying more than 5%, while Nationwide building society this week launched a regular savings account paying 8% (it’s exclusively for current account customers).
