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HomeInterest rates: Why there is more pain still to come

Interest rates: Why there is more pain still to come

  • By Kevin Peachey
  • Journalist’s living expenses

image source, beautiful images

The 14th consecutive increase in interest rates has caused anxiety and financial pain for mortgage holders – but it has also boosted savers’ bank balances.

Millions of people in the UK are both borrowers and savers (while some are borrowers or non-saver), so the balance – or imbalance – between the two is important. value our money.

Documents released after the prime minister’s Autumn Statement on Wednesday give an interesting insight into which way the scales are shifting.

This year, according to the UK’s official economic watchdog Office for Budget Responsibility (OBR), the benefits of better savings returns have far outweighed the impact of higher mortgage rates. Our households’ real disposable income – simply put, the amount of money we have to spend or save – increased slightly in 2023.

The thing is, that’s marked by this drop in disposable income in 2022 and another forecast drop in 2024.

Last year, everyone was affected by rapidly rising prices. Next year, an estimated 1.6 million homeowners will see their current mortgage deal expire and will therefore switch to a much more expensive loan.

In short, there will be more pain.

The OBR’s view is a forecast and it may ultimately be proven wrong, but the OBR is the official body that reviews the Treasury’s homework and its forecasts carry significant weight.

Impact is delayed

In recent days there has been much talk of tax cuts, pension increases and even speculation about the date of the general election. However, interest rates have a central impact on our finances and the power to decide them lies with the Bank of England, not the Chancellor.

After more than a decade of very low interest rates, they have increased continuously since December 2021. However, it has been two years now, what is the OBR? prospective documents tells us how relatively resilient our collective finances are to those increases this year.

“Rising interest rates support (general) household incomes as increased savings income from higher deposit rates by far outweighs the increase in interest payments from higher mortgage rates,” it said.

In real life, this effect is not evenly distributed. Many millions of people have less than £100 in savings. A whopping £260 billion sits in bank accounts without paying any interest. There is an entirely separate debate about tax rates on savings income.

Even if you’re not a homeowner, higher mortgage rates are likely to have an impact – as they are a key factor in rapidly rising rent prices.

The OBR’s figures are aggregate, creating the risk of drawing oversimplified conclusions, but what it says next is quite clear.

It points to a rise in interest payments over the coming year, as many fixed-rate mortgages face renewal. As a result, real household disposable income will decrease.

In other words, things will get tougher – even if the Bank of England decides that it will not raise interest rates above the current level of 5.25%.

What happens if I miss a mortgage payment?

  • If you do not pay your debt for two months or more, you are officially in arrears
  • Your lender must then treat you fairly by considering any requests to change the way you make payments, such as reducing your repayments for a short period of time.
  • They may also allow you to extend the term of your mortgage or allow you to pay interest only for a certain period of time.
  • However, any settlement will be reflected on your credit file, which could affect your ability to borrow money in the future.

However, there is some good news for those facing a mortgage shock next year, as there is more competition in the mortgage sector. Suppliers have money available to lend so they have cut mortgage rates.

According to Aaron Strutt from broker Trinity Financial, although many people face spikes in debt repayments, they will not be as “dramatic” as they have been recently.

“Banks and building societies have been busy lowering interest rates and there has been a significant change in prices. After offering high interest rates for such a long period, there are now two-year revisions starting at 4.78% and five-year revisions starting.” at 4.43%,” he said.

“If you have chosen a new mortgage rate with your current lender or a new lender, you should check to see if the interest rate has reduced. Most lenders allow borrowers to switch to cheaper deals they offer weeks before remortgaging. begin.”

As we know, there is another side to that coin. While mortgage rates may be falling again, analysts say savings rates may also have peaked – including at the US-owned National Savings and Investments (NS&I). Treasury,

Laura Suter, head of personal finance at the investment platform, said: “Savers should brace for interest rate cuts on NS&I accounts and a drop in Premium Bond prize funds, as the government-backed provider exceeded its fundraising target for the tax year.” AJ Bell.

MPs on the influential Finance Committee have accused big banks of doing “as little as possible” when setting savings rates for loyal customers. They advise people to keep shopping around to get the best return.

So a busy week of economic announcements is now taking us into a busy holiday season for our finances.

Prime Minister Jeremy Hunt talked about cutting National Insurance in January, increasing the state pension by 8.5% and welfare by 6.7%, as well as increasing the minimum wage in April.

He said these will help people pay their bills and show how things are moving in the right direction.

A spokesperson said: “Average disposable income is around £800 higher than the OBR expected this spring and the Autumn Statement sets out a clear plan to reduce our borrowing and debt I aim to keep inflation down, helping mortgage interest rates fall to affordable levels.” for the Treasury.

However, even if prices do not rise at the same rate as before, the financial pain suffered by millions is far from over.

What are my savings options?

  • As a saver, you can search for the best account for you
  • Loyalty often goes unrewarded because old savings accounts have the lowest interest rates
  • Savings products are offered by many providers, not just major banks. The best deal isn’t the same for everyone – it depends on your circumstances
  • Higher interest rates are offered if you lock your money away for longer, but that won’t suit everyone’s lifestyle
  • Charities say it’s important to try to keep some savings, no matter how tight your budget, to help cover any unexpected costs.
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