In normal times, when central bankers hike interest rates, banks increase both savings and mortgage rates. These are not normal times. After September’s interest rate decisions, savings rates have started to rise but mortgage rates are falling. What’s going on?
Markets are confused. They hoped that central bankers would give us a clear signal in September that interest rates had finally peaked, and would start falling next year.
That’s broadly got what we got in the UK, where the Bank of England froze base rates at 5.25 percent, and suggested they may not climb any higher.
Yet it’s a very different story in the US. While the UK economy is clearly slowing, the US is red hot, despite attempts by the Federal Reserve to crush inflation by hiking base rates to 5.5 percent.
Although the Fed did not increase rates in September, it delivered what markets see as a “hawkish hold”. Markets now expect the Fed to hike rates once again this year, with potentially more to follow. This could send interest rates as high as seven percent.
Markets expect interest rates to stay higher for longer, rather than falling back sharply in 2024.
Yields on 30-year US government bonds soared above five percent earlier this week, the highest since before the financial crisis, and this could have a direct impact on your own finances, said Mark Hicks, head of savings at Hargreaves Lansdown.
“Just when we thought savings rates had peaked, we are starting to see rates creep up again, despite the Bank of England’s decision to hold the base rate steady in September.”
In good news for savers, Hicks said two-year fixed rate bonds have climbed above six percent again, with Ford Money paying 6.05 percent and Cynergy Bank paying 6.0 percent.
Over one year, National Savings & Investments continues to offer its market beating one-year bond paying at 6.20 percent but Hicks added: “A number of smaller challenger banks are pushing their one-year rates up with Oxbury Bank now offering 6.11 percent.”
The Oxbury account can only be opened online and requires a minimum opening balance of £1,000, with the maximum set at £500,000.
Beehive Money, from Nottingham Building Society, is close behind paying 6.10 percent fixed for one year.
However, longer-term fixed rates have been falling slightly. JN Bank now offers the best buy five-year fixed rate at 5.80 percent a year, but others are cutting rates.
That’s because banks anticipate lower rates further down the line.
Annuity rates are also climbing again. A 65-year-old with a £100,000 pension can now get a level income of £7,436 a year, guaranteed for life, Hargreaves Lansdown figures show.
Independent pension expert Andrew Tully said this could be a good time to look into annuity, as rates may not rise much higher from here. He suggested a mix-and-match approach. “Savers could use some of their pension to buy an annuity and leave the rest invested in drawdown.”
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With interest rates set to stay higher for longer, it’s not hard to see why savings and annuity rates are rising.
The odd thing is that mortgage rates continue to fall, with Nationwide the latest lender to cut.
It has reduced its mortgage rates by up to 0.40 percent, and now offers a five-year fixed rate remortgage up to 60 percent loan-to-value (LTV) at just 4.99 percent with a £999 fee.
Five-year fixes are more competitive as lenders expect interest rates to have fallen towards the end of the mortgage term.
However, shorter-term loans are still relatively expensive, with Nationwide’s three-year fixed rate at 60 percent LTV charging 5.49 percent, again, with a £999 fee.
Mortgages were arguably overpriced before. Competition is now driving them back down. But short-term mortgages are still pricey as hopes of an early interest rate cut recede.
Tomer Aboody, director of property lender MT Finance, said mortgage rates are fluctuating on a daily basis, causing uncertainty for both buyers and sellers. “This makes for instability and lower transaction volumes.”
If more lenders cut mortgage rates this could restore housing market confidence, he added. “This will hopefully encourage buyers and sellers to act in the final quarter.”
What happens to both savings and mortgage rates now depends on the US war on inflation, rather than our own.
This leaves savers and borrowers at the mercy of events across the Atlantic. Once it becomes clear that interest rates have peaked, both savings and mortgage rates will fall as markets look forward to rate cuts next year.
When that happens, savers and borrowers will have very different reactions.
