As widely expected, the Bank of England (BoE) raised the base interest rate another 0.25% to 5.25% in a move that might further squeeze household budgets.
The good news is that inflation is falling - with the recent drop from 8.7% to 7.9% proving far sharper than expected. But it is still above the Bank’s 2% target and there’s still a long way to go, so another interest rate hike could be in the pipeline.
This article isn’t personal advice. If you’re not sure what’s right for you, seek advice.
What it means for mortgages
Today’s rise piles more misery on homeowners with those on tracker mortgages seeing overnight rises. Standard variable rate mortgage holders may find their rates move up slightly too but, with already strained budgets, any increase is hugely unwelcome.
For fixed rate mortgages, the story is different with signs that we may be around the peak. We’ve seen big rises in new fixed rate products recently which has caused real alarm.
After rising from less than 6% in the middle of June, average two-year fixed-rate mortgages hit 6.86% in late July, according to Moneyfacts. However, in recent days, we’ve seen several major lenders cut their rates, so we’re expecting average rates to drop.
This is because fixed rate deals are priced based on what the market expects to happen to rates in the future. As inflation proved stubborn, we saw rates rise but the recent sharp fall means the market isn’t expecting interest rates to go quite as high as previously expected.
As a result, it’s cheaper for lenders to secure a fixed rate, so they are passing those savings on. Any downward trend will be welcomed by people looking to fix their mortgage costs. But it’s fair to say if you’re looking to re-mortgage, you’ll find yourself far away from where you were when you got your last deal.
What it means for savings
Fixed rate savings tend to move more slowly than their mortgage equivalents, but average rates hit more than 5% by mid-July, according to Moneyfacts. However, if you shop around you can potentially get much more, with the most competitive accounts offering more than 6%.
The result has been a flurry of fixing. Of the new money going into Active Savings, HL’s online cash savings platform, in July, 74% of it has gone into banking partner products that have a fixed rate – this is up from 66% in June. More than three quarters of fixes are for a year or less, so savers are capitalising on these shorter-term fixed rates. If you’re thinking of using a fixed term product, it’s important to consider when you’ll need access to that money again.
Considering the latest rate rise, it might be worth thinking about how you could get more from your own savings.
Please remember, fixed rate products generally don’t let you access your savings until the term ends. You should hold rainy day savings in a product you can access easily.
What it means for annuities
If you are considering an annuity, then today’s announcement could bring more good news with the potential for income increases.
According to our latest annuity rate data of all UK annuity providers on the open market, a 65-year-old with a £100,000 pension can get an income of up to £7,358 per year. That’s based on a level annuity with a five year guarantee built in. Rates are based on your personal circumstances and you could get a higher income by confirming health and lifestyle information. Apart from a brief period last Autumn, when the mini-Budget sent gilt yields rocketing, you haven’t been able to get annuity incomes like this for over a decade.
When you compare this to the £4,946 the same person would have got just two years ago, you can see why some are taking a closer look.
Rising interest rates are one factor that feed into annuity rates, and they started to shift significantly higher on the back of the BoE’s decisions to hike rates. We can’t be sure that we will see increases off the back of another boost, but it is a strong possibility. We can also expect retirees looking for a level of secure income to keep a close eye on the market.
If you need a secure income in retirement, then annuities should always be a consideration.
If you’re concerned about missing out on future increases by tying into an annuity today, you could always consider annuitising in slices throughout retirement. You don’t have to annuitise your whole pension pot at once.
This means you can leave the remainder invested in your pension, and you potentially benefit from higher annuity rates later as you tend to get a higher annuity income the older you are.
Shopping around can help you get the best annuity deal. If you’re 55 or over, you can compare quotes from all UK annuity providers on the open market with our online tool. The options you choose can impact the annuity income you get. Consider your options carefully as once your annuity is set up it can’t be changed. Annuity rates change regularly, and quotes are guaranteed for a limited time.
What you do with your pension is an important decision. The government's free and impartial Pension Wise service can help you understand your retirement options and we can offer you advice.
Article image: Getty images - Justin Tallis