Boss of the Bank of England, Andrew Bailey, recently stated that the British central bank was determined to “stay the course.” He made the statement as he announced that the bank’s key interest rate was to be increased by a further 0.25% from 4.25% to 4.50%, in efforts to slow down and eventually reverse the rate of inflation.
It’s the 12th increase in a row, meaning that over the course of the past 18 months, the key interest rate has increased by 4 whole percentage points. It doesn’t bode well for those with, or seeking, a mortgage, or those looking to re-mortgage.
The effect on households with outstanding mortgages has already been keenly felt, but it is just the tip of the iceberg. Much of the problem to date has been hidden by the recent resurgence of fixed-rate mortgages. In 2022 they accounted for £9 out of every £10 borrowed.
Because these mortgage rates are fixed for a short period, the effect has yet to be felt in many UK households. It means that though rates are now supposedly nearing their peak, the real pain is yet to come.
According to the resolution, aggregate annual mortgage bills have gone up by £4.2 billion since the Bank of England began raising its rates. There is a further approximate £8 billion bill to come which will be felt over the next few years, with £5 billion being brought to bear in the next 12 months.
Among the 7.5 million mortgagor households affected by the rate rising cycle since the end of 2021, approximately half have not yet seen a change in their mortgage rate.
In terms of household finances, this could see mortgage market annual mortgage repayments increasing by an average of £2,300 over the next year – something that will affect around 1.6 million households as their fixed-rate mortgage deals come to an end.
This looming increase in mortgage costs will have significant implications on the living standards of many households.
Younger households, especially those with lower incomes and higher mortgage-to-income ratios, will face a larger living standard hit. Repayments for 18-34-year-old mortgagors are projected to increase by 3.4% of income, almost double the increase for those aged 55 and above.
While the wealthier households will bear the brunt of the £12.3 billion increase in mortgage costs, given that 75% of the increase will affect the richest 40% of households, the shock to living standards will be most keen by the low- and middle-income households. Their mortgage payments will increase by more than 4% of income in terms of households in the second lowest quintile income bracket, detrimentally impacting their average UK savings capability.
But for those who still strive to save, incentives remain low, with interest rates being offered on savings accounts still lagging behind, despite the recent hikes in the BoE’s key interest rate.
It has triggered action from the cross-party Treasury Select Committee of MPs, who have written to the chiefs of Nationwide, Santander, TSB, and Virgin Money seeking an explanation as to why the interest rates on easy access savings and other lower paying accounts have not been increased proportionately.
In letters written by the chair of the committee, Harriet Baldwin MP, reference was made to the increased pre-tax profits made by each of the banks last year. Profits recorded were £1.6 billion for Nationwide, £1.9 billion for Santander, £183 million for TSB, and £595 million for Virgin Money.
The letters infer that the banks’ profits have increased at the expense of their loyal savers, who are still yet to benefit from savings rate increases apparently being withheld.
In April 2023, the chief executive of the financial conduct authority, Nikhil Rathi, also expressed concern regarding being provided with more evidence concerning savings rates and competition in the retail banking sector.
His tack was regarding the continuing standing practice of banks and building societies to offer more attractive interest rates to new savers, while existing savers remain on less competitive rates. He rightly maintained that this inequality would have a more harmful effect on loyal, long-standing customers, even more so as the BoE’s key interest rate continues to rise.
While Nationwide, Santander, TSB, and Virgin Money have yet to reply, a spokesperson for Santander said that they are in the process of providing a response, stating that in recent months they have launched market-leading interest rates across their savings accounts and cash ISAs.
A spokesperson for Nationwide has also issued a statement prior to replying to the letter, maintaining that in recent months their average deposit rate has been 42% above the market average and that they aspire to pay the best rates they can sustainably afford.
The spokesperson went on to say that as a building society, they are different from banks due to the fact that they are owned by their members and that, accordingly, they always seek to find opportunities to reward them with better value.
However, in the meantime, many households are facing a double-edged sword that cuts two ways – higher mortgage repayments and lower interest rates on any savings they are able to scrape together.
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