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Another month passed and another letter came from my mortgage lender. The Bank of England’s decision to raise the base rate means that repayments on my tracked loan are gradually increasing – again.
Am I annoyed? almost not. Choosing a lifetime tracker when I remortgage my London flat in 2008 was one of the best financial decisions of my life.
When I first took it out, the rate was about 5%, but soon it fell like a rock to below 1%. Instead of lowering my monthly repayments, I stayed at the same level and then paid off more as my salary increased.
The end result is that now, with interest rates rising, I’m close to paying it off (interest rates are so low that I slowed down the overpayment a few years ago to increase my pension and Isa contributions).
I’ve benefited greatly from interest rates staying “lower for a while”, but the prospect of interest rates “rising faster” raises all sorts of questions about our personal finances.
Investors are bracing for a quick rise in interest rates as the world’s central banks battle higher inflation.
In the United States, the Federal Reserve has recently established First rate hike since 2018and is expected to increase seven more times this year (officials expect a modest 3% rate hike by 2023).
In the UK, the market is pricing in rates rising to 2% by the end of the year, despite the Office for Budget Responsibility (OBR) warning of rates May reach 3.5% next year If high inflation persists.
In the race to control inflation, economists worry fast tightening As businesses (and governments) absorb higher borrowing costs, trigger the risk of recession and higher unemployment.
All of this uncertainty is weighing on global stock and bond markets and raising an unwelcome outlook “Stagflation” — rising inflation combined with slowing economic growth.
This is challenging territory for all investors, especially those nearing retirement or who have already started earning income from their investments.
as discussed above Money Clinic Podcast of the Weekyounger investors worry it could mean Traditional 60:40 Portfolio Divergence between stocks and bonds and be wary of the risk of taking on more equity exposure to expand your funds.
What does rising interest rates mean UK property prices (maybe) more likely to be in the conversation at your next dinner party.
considering Double-digit house price growthyou might think that rising interest rates would cool the market.
in a recent notes, research firm Capital Economics described real estate as a “weak link” in rising interest rates. Still, it predicts that rates will have to hit around 4% to trigger a price drop, unless quantitative tightening leads to greater economic volatility than expected (rising unemployment will affect mortgage lenders much more than rising rates).
But what about the impact on the consumer economy? As someone with a variable rate mortgage and rising monthly costs, I’m in a very minority.
Fixed-rate loans now account for around 80% of the UK’s £160m mortgage market, said Jason Napier, managing director of research at UBS Europe Bank.
He said that so many UK consumers were locked into low-rate deals, which meant “there will be little immediate consumer change as the Bank of England raises rates”.
Unfinished fixes are split almost 50:50 between two-year and five-year terms, so the “payment shock” of rolling to higher rates is a very big deal tomorrow.
Even if you still have a few years to work out, consider how the OBR’s 3.5% plan can inflate your monthly payments.
“The average interest rate on outstanding mortgages in the UK is 2.1%,” Napier said. “On a standard 25-year term, if interest rates go up by 1%, then for every £100,000 borrowed, monthly repayments will increase by around £100.”
Napier believes that the scale of rate hikes currently expected by the market is unlikely to push many households into default. Most borrowers will be “stress tested” with interest rates of 5% to 6%, the average mortgage rate at the time of Northern Rock’s bankruptcy. But coupled with other cost-of-living pressures, neither bodes well for consumer spending.
If I had a larger loan, I would double-check my mortgage documents to see how much I might overpay (these are usually capped at 10% of the outstanding balance each year).
use one Mortgage Overpayment Calculator View outstanding balances that may decrease at the end of the repair. When the time comes, the lower the value of your loan, the higher the interest rate you will receive.
Can help adult children if parents have excess funds in the bank Regular gift of excess income Not only can they reduce the size of their mortgage, but also reduce their future estate tax liability.
Changes in benchmark rates have less impact on short-term borrowing costs, but record levels credit card spending The alarm bells have been sounded.
It’s hard to say how much of February’s £1.5bn spending spree – the highest monthly spending on record – was due to struggling consumers borrowing to cope with rising living costs, or wealthier people enjoying new freedoms .
I spoke to Chris Giles, economics editor at the Financial Times, and he sees both trends happening at the same time. With a standard bank overdraft rate of 40%, should we be surprised that consumers think the typical 20% fee charged by credit cards is a better deal?
As it turns out, we all used our credit cards to book family vacations later in the year (boosting the dual appeal of consumer protection and loyalty points).
We’re careful to pay off our monthly balances in full to avoid charging interest, but not everyone can afford it – and zero-interest deals are getting harder to come by.
Perhaps the only silver lining is higher interest rates on cash savings accounts.Currently, new entrant Chase offers market-leading rates 1.5% Account balances up to £250,000.
That’s good news for stressed savers, but it’s still nowhere near inflation, which is expected to hit 8% by the end of June.
Taking more risk and investing, paying off a large mortgage, or (dare I say so) spending it on a hard-earned vacation may prove to be a better use of your cash.
Claer Barrett is the Financial Times’ consumer editor: [email protected]; Twitter @Claerb; Instagram @Claerb
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