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Interest rates are going up. Kay Hill looks at how the news affects your housebuying journey

After more than a decade of interest rates sitting at rock bottom, there is no doubt now

that they are on the rise. At the February meeting of The Bank of England’s Monetary Policy Committee (MPC), the Bank Rate (also known as the base rate) was increased from 0.5% to 0.75%, and at the May meeting it was increased yet again from 0.75% to 1%, bringing it to the highest level it has been for 13 years.

The Bank Rate is the rate of interest that the Bank of England pays on balances held by commercial banks and building societies, so any changes influence the rates that those institutions offer their customers in return. The increases in the base rate means, in essence, that borrowers will pay more while savers will receive more in interest, although the changes are seldom passed on fairly!

JOY FOR SAVERS?

If you were hoping for an immediate boost to your deposit savings then you will be sadly disappointed. A survey by Defaqto after the February rate rise found that less than half of banks and building societies put their savings interest rates up at all, and only one in 10 passed on the full 0.25% increase. Many of the biggest banking names are still paying derisory 0.01% rates on easy access and current accounts.

However, overall rates have been creeping up – at the time of writing it was possible to get an easy access account paying 1.5% through the Chase app, 2.25% on a one-year fix with Investec and 2.55% with PCF Bank on a two-year fix. Nonetheless, when inflation is taken into account, even the best interest rate means you are still losing money.

“On the face of it a rate rise looks good for savers, but high inflation spoils the party,” explains Becky O’Connor, Head of Pensions and Savings at interactive investor. “Savers and investors are damned if they do and damned if they don’t. Every option seems to have a downside. Decisions on where to keep money may ultimately come down to what looks like the least bad option.

“People can either leave their money at the mercy of inflation in savings or in investments at the mercy of global stock market volatility, caused

EXPERT COMMENT

While banks are very quick to pass on any Base Rate increases to their mortgage customers, savers have to wait longer and many won’t see any increase at all. Lots of people’s savings are just sitting in their current account or old savings account, earning 0.01%. And these people likely won’t see an increase in the interest rate they’re being paid, instead banks will pocket the difference. However, the best buy rates will improve, which means that savers can nally get a bit more money on their cash, but they’ll need to put in some legwork. However, savers are still losing a large amount thanks to in ation. In ation is expected to rise to 8%, which means that with a savings rate of 1% savers are making a 7% loss on their money’s spending power – someone with £20,000 of savings is losing £1,400 a year. Some might be tempted to x their money to get a higher rate. For example, the top two-year x pays almost double the interest of an easy-access account. But savers need to seriously consider what interest rates will do and if that deal will look attractive in a year or two’s time. Markets are expecting more increases and for rates to be sitting at 1.75% by the end of 2022. If that’s the case, anyone who has xed won’t be able to bene t.

Laura Suter, Head of Personal Finance, AJ Bell

among other things by rising inflation and interest rates coming together. Neither seems particularly appealing if you are trying to preserve and grow the value of your hard-earned money. But leaving spare cash in a current account rather than in savings or investments isn’t an answer – it will be eroded by inflation there too.”

SAVVY SAVING

The best advice is to review your savings and shop around. First of all, make the most of your LISA – as well as the interest being tax free, it gives you a 25% bonus on top of what you save. If you’re between 18 and 39 you can save £4,000 each tax year and claim an extra £1,000 from the Government, but you can only use it for a first home costing under £450,000 or a pension. The current best buy LISA is from Moneybox, paying 0.85%. You can combine a LISA with other ISAs, but the total put into all of them is limited to £20,000 a year. Best buy cash ISAs include Marcus (1%, instant access), Shawbrook Bank (1.6% fixed for a year) and Hampshire Trust Bank (2.05% fixed for two years). Bear in mind, however, that basic rate taxpayers can earn up to £1,000 interest a year and 40% rate taxpayers up to £500 without needing to pay tax on it anyway, so unless you have substantial savings the ISA may not be your best bet.

Investing (anything where your original capital is at risk, such as shares, bonds and cryptocurrencies, for example) may promise higher rewards, but also carries the very real risk that you may lose what you have already saved.

MORTGAGE BLUES

With the uncertainty of rising rates, many mortgage providers have pulled their best deals from the market, with Moneyfacts reporting that at the beginning of March there were 518 fewer products for borrowers to choose from now than there were at the start of February. Rates for all types of mortgage are rising, particularly standard variable rates which jumped by 0.15% to 4.61% in March, the largest single monthly rise on Moneyfacts’ records. Fixed rate mortgages, which don’t increase if there’s a base rate rise during the term, had also risen to an average of 2.65% for a twoyear fix and 2.88% for a five-year fix.

Adrian Anderson, Director of property finance specialist Anderson Harris, comments, “During this anxious time when the cost of goods and services are increasing, and outgoings are being squeezed, taking a medium to longer term mortgage fixed rate can help with budgeting and provide peace of mind.” He warned however, “There can be a cost to the peace of mind associated with longer term fixed rates and these are the early repayment penalties that may be incurred if the mortgage is redeemed during the fixed rate period.” You may want to talk to a financial adviser or mortgage broker to help you make the right choice.

Historically, interest rates are still low (the base rate hit 17% in 1979), and Nathan Emerson, CEO for Propertymark, stresses, “It’s important to remember it remains relatively cheap to borrow money, and we expect that to continue to feed the appetite that there is for property as a good longterm investment.”

Undoubtedly lenders will be cautious when it comes to affordability, and will want to know that borrowers can withstand future increases, so it is vital to make sure that your finances look squeaky clean and healthy before you make the first approach. Cutting down unnecessary expenditure now will make you look more appealing to lenders as well as boosting your savings.

WILL PRICES FALL?

Now we are into crystal ball territory. UK average house prices increased by 10.9% over the year to February 2022, bringing the average home to £277,000 – £27,000 higher than the previous year. Sarah Coles, Senior Personal Finance Analyst at Hargreaves Lansdown says, “The property market continues to defy gravity. Despite rising rates and runaway inflation putting the squeeze on affordability, February saw another record average price. However, change may be on the way.

“We already know that mortgage companies are increasing the assumed costs in their affordability calculations, which will make it harder for people to get a mortgage. Meanwhile, rising prices and higher rates are feeding into the cost of new mortgages.

“If the Bank of England continues raising rates along with market expectations, we could see the average two-year fixed rate mortgage top 4% this year. The imbalance between supply and demand is likely to put a floor under prices, so we’re far more likely to see a slowing in price rises rather than falls.” That seems to be the general consensus among experts, with most predicting a much more modest annual rise of around 3% in the coming year.

IS IT A GOOD TIME TO BUY?

Buying is usually cheaper than renting, so in that sense it’s definitely a good time, but be cautious of overstretching, warns Sarah. “First time buyers feel the pressure to get on to the property ladder before prices rise even further out of reach, and there’s a real risk that in order to do so they will take on mortgages that put their finances under even more strain.

“There’s nothing wrong with buying right now. If you have the money to do so, and plenty of room in your budget for rising mortgage costs, then as long as you’re in it for the long haul, it doesn’t make much difference what happens to house prices in the short term. However, if you’re stretching your finances to breaking point in a panic over rising prices, this is a good time to consider your options.”

EXPERT COMMENT

While house prices have been continuing to grow month-on-month, a slowdown and subsequent fall in house prices still seems inevitable, particularly given the challenging circumstances we are facing. CPI data shows in ation has now reached a staggering 7%. The Bank of England has hiked interest rates multiple times already, and a further hike in the coming months in an attempt to combat soaring in ation is widely anticipated. Rising interest rates have already been costly for prospective homebuyers and those looking to remortgage, as the more affordable mortgage rates have been removed from lenders’ shelves. Many people are feeling the squeeze nancially. With wages failing to keep up, the increased costs of moving home will likely put off prospective buyers and as a result, we could see house prices dip over the coming months. How the housing market truly reacts to the current circumstances is yet to be seen. However, it is unlikely that house prices will be able to continue rising at the same rate seen in recent times. If a slowdown does begin to materialise, a gradual fall in house prices is expected as opposed to a sudden drop. At present, there remains too much demand and too little stock, so house prices will likely remain high for some time yet.

Karen Noye, Mortgage Expert, Quilter