Bank of England holds interest rates at 5.25% – what it means for YOUR mortgages and savings

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The Bank of England has opted once again to hold the base rate at 5.25 per cent. 

The decision marks its fourth pause in a row, after the Monetary Policy Committee voted to hold the base rate first in September, and then in November and December.

Prior to that, there had been 14 consecutive base rate hikes since December 2021.

We explain why the Bank of England has paused interest rate rises and what it means for your mortgage, savings and the wider economy.

Fourth time in a row: The Bank of England has opted once again to hold the base rate at 5.25%

Fourth time in a row: The Bank of England has opted once again to hold the base rate at 5.25%

Why has the bank paused rate rises?

Today’s base rate decision was widely expected. 

The aim of increasing the base rate is to reduce the rate of inflation, which has led to higher costs in many areas of household spending including mortgages, energy bills and food shopping. 

Inflation reached a peak of 11.1 per cent in October 2022. From February 2023 to November 2023 it consistently fell, and there were hopes a base rate cut may be brought forward. 

However, a surprise rise in inflation in December 2023 made that far less likely. 

Slight uptick: The December increase in CPI caught markets by surprise

Slight uptick: The December increase in CPI caught markets by surprise 

Consumer price inflation edged up from 3.9 to 4 per cent, which disappointed against forecasts of a fall to 3.8 per cent.

The BoE has hiked base rate 15 times since December 2021, helping to drive consumer price inflation down from as high as 11 per cent in 2022.

But the rate remains well above the BoE’s target of 2 per cent, which it does not anticipate the UK will reach until the end of 2025.

By raising the cost of borrowing for individuals and businesses, it hopes to reduce demand, slowing the flow of new money into the economy.

In theory, more expensive mortgages and better savings rates should also encourage people to save more and spend less, further pushing down inflation.

When will the Bank of England cut rates? 

In recent months, forecasts for where the base rate will peak have fallen from a high of 6.5 per cent to the current 5.25 per cent level. 

While the Bank of England has not ruled out further rises, market expectations generally point towards a cut in the base rate later this year.

At present, investors are pricing in four or five interest rate cuts in 2024, with the first coming in May or June. 

Capital Economics has pencilled in the first rate cut for June, and suggested the Bank of England will cut the base rate to around 3 per cent by late 2025. 

Asset management giant Vanguard has also forecast cuts beginning in ‘mid-2024’ and predicted that base rate will be 4.25 per cent by the end of 2024. 

Future falls: Capital Economics is forecasting the the bank rate will be cut to 3% by the end of 2025

Future falls: Capital Economics is forecasting the the bank rate will be cut to 3% by the end of 2025

However, others are now predicting that the first cut could come later, or move at a slower pace. 

Steve Matthews, investment director, liquidity at Canada Life Asset Management, said: ‘Despite market expectations of four rate cuts this year, the Bank of England will be mindful of a secondary inflation effect and the geopolitical tensions we are seeing across the globe. 

‘Taking this into consideration our forecast suggests a more conservative estimate of three cuts, bringing the rate down to 4.5 per cent.’

Laith Khalaf, head of investment analysis at stockbroker AJ Bell, added: ‘Short-term interest rates fell back considerably in the last few months of 2023, providing some relief for mortgage borrowers, but it feels like the market may have got over-excited about looser monetary policy in the UK.

‘So far this year, expectations for interest rate cuts have retreated a touch, but market pricing still suggests there will be four rate cuts this year, starting in May or June. That’s pretty punchy.’

What does this mean for mortgage borrowers?

The higher base rate has led to higher mortgage costs for many – especially those who have needed to remortgage. 

There are 1.6 million mortgage borrowers expected to roll off their fixed rate mortgages this year, many of whom will currently be enjoying a mortgage rate of 2 per cent or less.

The average two-year fixed mortgage rate is now 5.56 per cent, according to Moneyfacts, and the average five-year fix is 5.19 per cent. 

These rates are much higher than many borrowers have been used to, but they have come down substantially in recent weeks and months.

As recently as mid-December, those averages were 5.99 per cent and 5.59 per cent.

> Check the best mortgage rates based on your home’s value and loan size 

Heading down: The average two-year fixed mortgage rate is now 5.56 per cent, according to Moneyfacts, and the average five-year fix is 5.19 per cent

Heading down: The average two-year fixed mortgage rate is now 5.56 per cent, according to Moneyfacts, and the average five-year fix is 5.19 per cent

The average borrower coming off a two-year fix would see their rate increase from 2.38 per cent to 5.56 per cent, if they fixed for two years again today.

On a £200,000 mortgage over a term of 25 years, this would mean monthly mortgage payments rising from £885 to £1,235 – an increase of £350 a month.

It’s important to also remember these are the average rates across the entire market. 

The cheapest deals available paint a more positive picture, particularly for those with big deposits or lots of equity built up within their home.

It’s possible to get a rate as low as 4.17 per cent on a two-year fix, and as low as 3.90 per cent when fixing for five years. 

It is worth speaking to a mortgage broker to find the cheapest deal that you may be eligible for.

There are also a handful of lenders who are increasing their rates slightly, though others continue to cut. 

Katie Brain, mortgage expert at Defaqto, said: ‘It may be a few months yet before we see a change in the base rate. 

‘The good news however, is that fixed mortgage rates have dropped considerably over the last few months.

‘It looks like rate changes are stabilising, although we are starting to see some lenders increase some of their rates, especially two-year fixed rates, ever so slightly.’

Matt Smith, Rightmove’s mortgage expert, added: ‘Average mortgage rates continue to trickle down on the whole, however we’re now seeing those with smaller deposits benefit the most, whereas those who need to borrow less have seen some small increases in rates due swap rate trends. 

‘We should see a stable few weeks for the mortgage market ahead of the Spring Budget.’

> How to remortgage your home: A guide to finding the best deal 

Brighter days ahead? Fixed mortgage rates have been falling, and experts say we are heading for a period of relatively 'stability' when it comes to the cost of home loans

Brighter days ahead? Fixed mortgage rates have been falling, and experts say we are heading for a period of relatively ‘stability’ when it comes to the cost of home loans

Mortgage borrowers on tracker and variable rates may be disappointed that the base rate has not started to go down. 

Variable rate mortgages include tracker rates, ‘discount’ rates and also standard variable rates. Monthly payments on all these types of loan can go up or down.

Trackers follow the Bank of England’s base rate plus or minus a set percentage, for example base rate plus 0.75 per cent.

Standard variable rates are lenders’ default rates that people tend to move on to if their fixed or other deal period ends and they do not remortgage on to a new deal.

These can be changed by lenders at any time and will usually rise when the base rate does, but they can go up by more or less than the Bank of England’s move.

What next for fixed rate mortgages?

Mortgage borrowers on fixed term deals should focus less on the base rate decision today, and more about where markets are forecasting the base rate to go in the future.

This is because banks tend to pre-empt the base rate hike. They change their fixed mortgage rates on the back of predictions about where the base rate will ultimately be in the future.

This is why the cheapest mortgage rates are now more than 1 percentage point below the base rate.

Market interest rate expectations are reflected in swap rates. These swap rates are influenced by long-term market projections for the Bank of England base rate, as well as the wider economy, internal bank targets and competitor pricing.

Sonia swaps are used by lenders to price mortgages, and these have been rising in recent weeks. This is one of the reasons why some lenders have slightly increased their mortgage rates.  

In early January, two-year swap rates were at 4.04 per cent, but as of today they have ticked up to 4.22 per cent. Five-year swaps were at 3.41 per cent and have risen to 3.67 per cent. 

That still offers a much more positive picture of the future of interest rates than in summer 2023, when five-year swaps were above 5 per cent and two-year swaps were coming in around 6 per cent.

Nicholas Mendes, mortgage technical manager at broker John Charcol, said: ‘Despite today’s announcement, mortgage rates are expected to continue steadily reduce over 2024.’

What does the base rate pause mean for savers?

The Bank of England’s successive interest rate rises between December 2021 and August 2023 were, by and large, very good news for savers.

It meant that savings accounts were offering some of the highest interest rates seen since 2008.

Now, with the base rate hike cycle appearing to peak at 5.25 per cent, as the Bank of England pauses it for the fourth successive month, savers might be sensing it is the end of the savings rate heyday for their nest eggs.

And they would be right. Previous headline-grabbing deals including Santander’s 5.2 per cent special edition easy-access rate and NS&I one-year bond paying 6.2 per cent have all but vanished.

Does YOUR savings account beat inflation? Keeping an eye on the CPI figure is key to knowing whether or not your savings are being eaten away by it

Does YOUR savings account beat inflation? Keeping an eye on the CPI figure is key to knowing whether or not your savings are being eaten away by it

Fixed-rate accounts have been hit the hardest. Just yesterday, NS&I slashed the rate on its three-year fixed-rate Green Savings bonds to 2.95 per cent from 3.95 per cent. The account has seen a stunning 48 per cent cut in just five months from when an issue was launched in August 2023 paying 5.7 per cent. 

However, many of the best savings rates available still beat inflation, which was at four per cent in December. This is crucial because it means the value of your money is not falling in real terms. 

The best one-year fixed-rate account on the market now pays 5.16 per cent, down from a high of 6.2 per cent in October 2023. 

 If your cash has been sitting with a high street giant, it’s well worth considering a switch to another bank or savings platform where your savings can work harder

Sarah Coles, Hargreaves Lansdown 

Easy-access rates have fared slightly better, falling less sharply than their fixed-rate counterparts. 

The best easy-access rate pays 5.15 per cent, down from a high of 5.2 per cent a few weeks ago.

If you haven’t reviewed your savings recently, make sure you check your rate and move to a table-topping rate while you still can.

> Check the best savings rates using This is Money’s independent best buy tables 

Sarah Coles, of stockbroker Hargreaves Lansdown, said: ‘Savings rates peaked a while ago, and have been falling gradually for weeks, as the market digests the fact that we’re unlikely to see any more Bank of England rate rises in this cycle.

‘2024 is likely to bring more of the same, as it starts to reflect an expectation that interest rates will fall. We expect to see them slowly drift south throughout the year.

‘It means shopping around will be more important than ever as rates fall. 

‘If your cash has been sitting with a high street giant, it’s well worth considering a switch to a smaller or newer bank, or a cash savings platform, where your savings can work harder.’

Is it downhill from here for savings rates?

Rather than savings rates crashing back down, most commentators are expecting a gradual decline over the coming years.

Andrew Hagger, personal finance expert and founder of MoneyComms said: ‘I can’t envisage any dramatic changes over the next few years’.

Andrew Hagger, personal finance expert and founder of MoneyComms says he expects savings rates will slowly start to slip back

Andrew Hagger, personal finance expert and founder of MoneyComms says he expects savings rates will slowly start to slip back

‘I think we will see a very gradual decline in base rate from a high of 5.25 per cent this year to somewhere around the 4 per cent mark in the next three years.

‘As for 2024, perhaps a couple of 0.25 per cent cuts towards the end of the year would be my prediction.

‘I therefore expect easy access savings rates to hover around the 5 per cent mark for the coming 12 months.

‘Meanwhile, I think one-year fixed rate savings deals will continue to fall back over the coming year.’

Which banks offer the best savings rates?

When it comes to choosing an account, it’s always worth keeping some money in an easy-access account to fall back on as and when required.

Most personal finance experts believe that this should cover between three to six months’ worth of basic living expenses.

The best easy-access deals, without any restrictions, pay north of 5 per cent. If you’re getting a lot less than this at the moment, then consider switching to a provider that pays more.

In terms of the best of the best, Coventry Building Society is now offering a market-leading easy-access deal paying 5.15 per cent.

Someone putting £10,000 in Coventry’s account could expect to earn £515 in interest over the course of a year.

> Find the best easy-access savings rates here

Those with extra cash which they won’t immediately need over the next year or two should consider fixed-rate savings.

The best one-year deal is offered by SmartSave Bank, paying 5.16 per cent.

But the gap between one year-fixed rate deals and easy-access accounts has narrowed to just 0.01 per cent, which is almost negligible.

There are no longer any one-year fixed-rate accounts paying 6 per cent or more, and it looks like this could soon be the case for accounts paying 5 per cent or more.

There are now 13 fixed-rate accounts offering a rate of 5 per cent or more, though at the last Monetary and Policy Committee meeting in December there were five one-year fixes paying 5.5 per cent or more. 

Bridging the gap: The chasm between the top easy-access rate and one-year fixed-rate savings account has narrowed to a mere 0.01%

Bridging the gap: The chasm between the top easy-access rate and one-year fixed-rate savings account has narrowed to a mere 0.01%

Someone putting £10,000 in Smartsave’s deal will earn a guaranteed £517 interest over one year. It comes with full protection under the Financial Services Compensation Scheme (FSCS) up to £85,000 per person.

Other top saving accounts are Investec Bank which is paying 5.15 per cent, Hodge Bank paying 5.14 per cent and Shawbrook Bank paying 5.12 per cent. All offer FSCS protection.

> Check out the best fixed rate savings deals here

Savers should also consider using a cash Isa to protect the interest they earn from being taxed.

The top one-year fixed-rate cash Isa is paying 4.98 per cent interest, while the top two-year fix is paying 4.7 per cent.

Those wishing to keep their money in an easy-access cash Isa can also get 5.08 per cent with Zopa Bank.

> Check out the best cash Isa rates here

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