What next for interest rates and how bad will it get for mortgages?

This is Money Podcast

This episode of This is Money Podcast examines the current volatility in the UK financial landscape, specifically focusing on why mortgage r

Key takeaways

• Mortgage rates are hitting levels not seen since late 2023 as banks adjust to higher swap rates.
• The Bank of England's recent rate decision resulted in a 6-3 split, with chief economist Hugh Pill supporting a hike.
• Savers can currently access fixed rates above 5%, including West Brom Building Society at 5.2%.
• Inheritance tax tapering affects the residence nil rate band for estates valued over £2 million.
• Direct investment in gilts offers the potential for tax-free capital gains if bonds are bought below par value.

Main topics

• Bank of England interest rate decisions
• Mortgage rate increases and swap rates
• High-interest savings opportunities

Notable quotes

It's all starting to build up, Georgie. It's all starting to build up for households. And there's a kind of anchor of gloom, it feels like, has kind of arrived.

Conclusion

The episode provides a comprehensive look at navigating rising costs i

Transcript preview

Speaker 3 (0:02) Welcome to This Is Money podcast sponsored by Trading 212. Download the Trading 212 app today and open a cashizer with promo code TIM to get the 12-month bonus promo rate of 4.69%. Terms apply. I'm Georgie Frost and joining me and Simon Lambert today is Lee Boyce. And coming up, interest rates are held, but how much longer? Mortgage rates are soaring, but how bad will it get? Good news for savers, though, as fixed rates climb. We reveal the best buys if you're happy to lock your money away. plus how to cash in on the bond market mayhem, even if you're a beginner. We talk inheritance tax allowances if your estate tops £2 million. And should you do a ROCOS and move to Greece, from property prices to tax, we reveal what you need to know. Don't forget you stay up to date with all the latest breaking money news. Just go to thisismoney.co.uk or download the app. But first, interest rates haven't budged. for nine months after the Bank of England kept them at 3.75 % this week. Unfortunately, though, mortgage rates have. Five-year fixes are now at their highest level since 2023, and lenders have been hiking rates across the board. So why are mortgages getting more expensive when the Bank of England hasn't done anything? Lee, welcome. Simon, welcome. The rate decision. Just keep us up to speed. What happened? And importantly, what was said in the minutes? Speaker 1 (1:22) Well, yesterday's rate decision came hot on the heels of the Fed rate decision the night before. And that is important to put it in context. And in the US, they voted to raise interest rates. And they didn't just vote to raise interest rates. They voted to raise interest rates 12-0. That was the vote. And also, I think probably you could go 12-1, really, because you've got the 12 members of the Fed committee, and then you've got one. Very important person, certainly in his own eyes, Mr Donald Trump, who is very much of the conviction that they should not be raising rates and they should actually be lowering rates. And there's a huge amount of pressure from Trump on the Fed, being placed on the Fed. And the Fed still raised rates. So the question is, why didn't the Bank of England? The Bank of England held. But the vote here was six to three. That was the split. The minority backing a hike did increase, though. And it included the Bank of England's chief economist, Hugh Pill. So this comes even as the bank is predicting inflation to go up to 4%. And the really scary number that was bandied around this week, other than mortgages, which we're going to talk about in a minute. was potentially the energy price cap surging 24 % in January. I mean, haven't we missed any surging energy bills? So much, Simon. Gosh, it's been so long since energy bills went through the roof. And Hugh Pill basically said an increase would send a clear signal of a commitment to hitting the inflation target amid the fog of geopolitical conflict and data noise. But Andrew Bailey... said there was very limited evidence of the energy price shock spreading through the economy causing second round inflation effects. So a rate rise is still on the table. It could come before the end of the year. It's probably quite likely to maybe come before the end of the year. But we might be going on a bit of a divergent path to the US perhaps. Speaker 3 (3:26) What people want to know, mortgage rates. Why are they going up? What's happening there? Speaker 2 (3:32) Well, the way that banks price mortgages is linked slightly to the place where it's more linked to swap rates and so on your swap rates and the way the banks borrow money, essentially. And that rate has been nudging higher. And actually this week, at the start of the week, we saw the five big banks all make big rises to their mortgage rates. Some of them now are not offering sub 5 % rates again, which is going to be a worry for anyone that's going to be remortgaging soon or trying to get onto the ladder. And there was then separate data this week suggesting that the average five-year fixed rate mortgage is now at a high not seen since November 2023. And so we are seeing mortgage rates now going. We had it at the start of the year when the Iran conflict sort of first broke out and mortgage rates started to surge a bit higher. They've fallen back a little bit over the summer and now they're going back up again and they've surpassed where they were at when the Iran conflict first started. And I think that Georgia, it's adding to some of the economic gloom that feels like it's sort of spreading this week because as Simon said, energy price cap potentially going up by 25 % in January just as the cold weather bites. That's not great for households. That could potentially be another few hundred quid a month you're going to have to find for your energy bill. Petrol prices are going through the roof. You know, there's some four quarts now charging. two pound a litre of diesel that that is high unleaded isn't quite at those same highs there's three quarters of a million people who are coming off of five-year fixes uh from 2021 and 2022 in the next sort of time period six to nine months who some of whom are still on ultra low mortgage rates of 0.9 percent uh from five years ago they're you know It feels like a lot of life and a lot of stuff has happened in the last five years. Those people could be coming to face a seismic shock and how much they're going to have to be repaying on their mortgage. Now, hopefully, you'd like to think that they've chipped away at some of their mortgage, so they won't be remortgaging at as high amount as what they did five years ago. And I'd also like to think that, especially if you're in this boat, if you're one of our... listeners or readers that you would have made Haywire the Sunshine, moved at that rate, it's probably not going to be that low forever, and started tucking away money elsewhere, overpaying mortgage, all that kind of thing. But that's going to be another few hundred pounds potentially that people are going to be having to find. It's Speaker 1 (6:05) a Speaker 2 (6:05) lot of money. It's all starting to build up, Georgie. It's all starting to build up for households. And there's a kind of anchor of gloom, it feels Speaker 1 (6:12) like, has kind of arrived. Just to put that into a real world context. I alluded to this last week when we were talking, but I actually know one of these people, my little sister. Her five-year fixed rate is coming to an end. She has been on 0.99%. And she spoke to a broker this week. She spoke to L &C, who does This Is Money's mortgage service. It's fee-free. You can use it. You can find out what it's going to cost you. And 4.88 % is the rate that she has been offered. From Speaker 3 (6:43) 0.99%. Speaker 1 (6:44) on a three-year fix yeah so she's going from 0.99 to 4.88 they are in the fortunate position where obviously thanks to a five-year mortgage and they've got relatively high equity in the property so it's quite a low loan to value so they're getting some of the best rates that you can get and I think I seem to remember that's probably going to push up their monthly payments by about 350 quid 350 pounds is a hell of a lot of money to have to find extra each month. Most people do not have £350 knocking around. I know for one, when I faced a similar thing, probably this time last year, it was a seriously detrimental hit to the amount of monthly disposable income we had, i.e. it basically wiped out most of the monthly disposable income. Speaker 3 (7:29) Simon, just a quick one on where this is going to head. Lee's spoken about a blanket of doom or gloom, doom or gloom, either way. both. In terms of interest rates, who knows? It's so unpredictable at the moment. Speaker 1 (7:42) I mean, I don't think there needs to be a blanket of gloom. We've got the budget to look forward to. Speaker 1 (7:48) Silence. Listeners, you could have heard a penny drop. The absolute silence from Georgie there. You're like, yep, we're not talking about that. You can't predict what's going to happen. If you take the scenario where President Trump comes to his senses, somehow this sort of ongoing conflict with Iran that goes up, goes down, goes up, goes down. manages to get sorted out, then all of a sudden, a lot of the things that people are worried starts to dissipate and to go away. Or you look at it and go, actually, I'm on Trump's side and I agree with him. We need to crack down on Iran and we need to do something about it. And it's right that he's doing something about it, in which case this is not going away and it's going to get worse. Or we just keep bouncing around the middle somewhere, which is what we've been doing, you know, since the... conflict started. And, you know, we just don't know. I mean, you know, how bad is the inflation shock going to be? At the moment, it's not that bad. But we do know from recent experience that it could get a lot worse. And the central banks are very, very keen to stress that, you know, they are... They are going to see how things unfold and they're going to act accordingly. They don't, as Andrew Bailey said last week, have a secret plan and then they're just going to stick to their secret plan. But they are going to be quite serious about cracking down on inflation because they got their fingers burnt last time and they were seen as being behind the curve, which I think is something that has contributed to the Fed raising rates in the face of such weight not to do so. There's one other quite important thing that happened with the Bank of England this week. And that's to do with gilts, which we're going to talk about in a bit. So I won't go into too much detail. But this could actually have a bit of an impact on the budget and potentially even on the future path of interest rates. The bank has started to overhaul the way that it's unwinding quantitative easing, which was the process that involved it hoovering up loads of very, very low rate UK government bonds in order to inject money into the financial system first after the financial crisis and then during COVID. It's been doing something called quantitative tightening, which basically involves selling those bonds back into the market. It's selling them at a big loss because the bonds that it's bought are very, very low yielding. It's got bonds that yielded like less than half a percent, whereas now you could buy bonds that yield more than 5%. So people don't want to buy them. So people are buying them at knockdown prices. But what it's also doing is because they're selling bonds into a market that doesn't want to buy them, it's creating extra supply when demand is low. And that's been blamed for pushing up gilt yields even further. Now, the fact that it has decided to basically pause sales of gilts for six months and halt sales of longer dated gilts is quite a big thing. It's a boost for John Healy because it could bring down our borrowing costs, but it could also mean that we maybe see a slight shift in this path of future interest rates off the back of it. Speaker 3 (10:56) As you said, we'll talk about gilts. But before we get there, we're going to talk about savers, Lee, your favourite subject. Because it's better news, isn't it, for savers? Fixed savings rates have climbed above 5%, with the best now paying at the time of recording, 5.2%. But is it worth locking your money away for many years in order to get it? Lee, what's going on out there? Speaker 2 (11:17) Oh, what's going on out there, Georgie? Savors are kind of getting a bit of a good deal again. That's what's Speaker 1 (11:22) happening. But Speaker 2 (11:23) you've got to remember, we've had the inflation rate this week, 3.1%. So whatever you do, you want your savings to be beating that rate to make sure that your wealth is growing in, you know, actually the power of your wealth is growing. The weird thing about it is that 5.2 % rate, as you say, you've got to lock away for quite a long time. That is a five-year fix. That's a West Brom Building Society cash rise of five years. If you want that guaranteed 5.2 % over five years, that might be the home for you. But you can get a 5 % on easy access up to £5,000. It might be a handy little home for you. That's through spring. And then you have one, two, three-year fixes that are paying above 5 % as well. So Investec, for example, have a one-year fix at 5%. You've got a minimum deposit on that one of £5,000. You can get 5.03 % at GB Bank and 5.15 % at West Brom. Essentially, rates are improving. There's more competition in the