After the BoE made its latest announcement last week, an expert looks at the fallout
The Bank of England’s Monetary Policy Committee voted in favour of holding the base rate at 5.25% for the second consecutive time on November 2.
But, how will this move impact the financial market? Mortgage Introducer reached out to an expert to find out.
How will the housing market be impacted by the base rate decision?
Chris Flower (pictured), chartered financial planner at Quilter, said for current and prospective homeowners, a further hold on interest rates will offer somewhat of a mixed bag.
“Those on variable rate mortgages will not see an immediate increase in their monthly payments, and the stability will provide further reprieve for borrowers, particularly those who may have been concerned about rising costs,” he said.
Flower added that data from the Bank of England earlier this week showed that transaction levels are currently so low that mortgage repayments outweighed the value of new mortgage debt taken out. The housing market, he said, is currently in a deep freeze and while a hold in rates is certainly not bad news, it is likely not going to thaw it out any time soon.
“However, if rate stability helps people begin to feel more financially secure, then house prices may drop less quickly than first feared, as more competition helps to prop up prices,” Flower said.
For those looking to remortgage or take out a new mortgage, Flower said, lenders appear to be remaining very strict with their criteria.
“Though fixed rates have lowered slightly, new borrowers or those looking to switch may not yet see significant reductions, but things are beginning to move in the right direction,” he said.
After all, Flower said, lenders are commercial entities which compete for custom, so we may see price wars which could help to push rates down further in the coming months.
How will savings be impacted by the base rate?
The higher interest rates we have grown accustomed to, Flower said, have helped grow people’s cash savings, but a further hold in rates while inflation remains elevated will see the value of these savings eroded rapidly in real terms.
“CPI inflation sits at 6.7%, and if your bank is only paying a savings interest rate of 5.25% in line with the Bank of England’s base rate, then you will be making a significant real terms loss of 1.45%,” he said.
As a result, Flower said that this can make it considerably more difficult for an individual to reach their financial goals.
To boost savings, Flower said, people may need to consider investing their money across different assets to seek out a higher return.
“The stock market has had a difficult period, but, historically, investing has provided inflation-beating returns over the longer term,” he said.
How will pensions be impacted by the held base rate?
If someone has a significant level of cash in their pension, Flower said, this further hold in interest rates will do little to help them as their level of growth will stagnate, while also remaining a long way from beating inflation.
The recent rise in interest rates, he added, has however had a positive effect on annuity rates, which are closely linked to government bond yields.
“Higher interest rates generally lead to higher bond yields, which in turn leads to better annuity rates,” Flower said.
For retirees looking to purchase an annuity, Flower said, as interest rates level off this may also mean the level of income they can secure for their retirement also levels off too.
If individuals continue to have to meet the higher servicing costs of mortgages, loans and other debts, he believes this may limit the amount they can afford to set aside for further pension contributions, impeding their opportunity to give their pension income a boost or even delaying the age at which they can afford to retire.
How will credit cards and debt be impacted by the held base rate?
Individuals with outstanding debts with variable interest rates, such as credit cards or overdrafts, or those looking to take on new fixed rate loans, Flower said, will continue to suffer as interest rates are held higher for longer, as the costs of servicing these debts will remain at elevated levels for longer too.
“Banks have been quick to pass rate increases on in this instance, so those in debt have seen their costs rise rapidly, and it looks unlikely that they will have any relief from this for some time yet,” he said.
To counter the increased cost of servicing debt, Flower said, it is vital to prioritise paying down high-interest debt first and to explore options for consolidating or refinancing loans to secure lower interest rates.
How do you expect the financial markets to be impacted by the decision to hold the base rate yet again? Let us know in the comment section below.