How to Make the Most of the Potential Peak in Interest Rates

Next week, the Bank of England will vote on whether to raise interest rates for the 15th consecutive time, potentially reaching a 16-year high. The current base rate is 5.25 percent, but economists predict that this may be the last increase in this cycle. With interest rates nearing their peak, it’s important to understand how this will affect mortgages, pensions, and savings, and how you can take advantage of this situation.

Mortgages – Consider Trackers and Fixed Rates

Interest rate changes have a significant impact on mortgage costs. If you have a tracker deal, your mortgage costs will increase or decrease whenever the base rate changes. Standard variable deals also usually fluctuate in line with interest rate changes, but it’s up to your provider’s discretion. If you have a fixed mortgage deal, your costs will remain the same until the end of your term, at which point you will need to remortgage and potentially pay more.

Brokers suggest that with interest rates nearing their peak, those nearing the end of their mortgage term may benefit from considering tracker deals. These deals are less likely to see an increase in costs since the base rate is unlikely to rise significantly. It’s also worth noting that some tracker deals have no early repayment charges, providing borrowers with the flexibility to switch to a fixed rate without incurring additional fees.

If you decide to opt for a tracker deal, keep in mind that if the economic situation changes, you might still face increased costs. It’s important to be cautious and understand the potential risks. On the other hand, fixed rates are still high, and if you want certainty in your mortgage costs, a longer fix of five or ten years may be the best option. However, be aware that these rates may seem expensive if interest rates fall in the future.

Pensions – Annuities and Flexibility

The rise in interest rates has a positive effect on annuity rates. Annuities provide you with a guaranteed income for life and can be purchased with your pension savings. As interest rates and gilt yields (interest on government lending) increase, you can expect higher returns if you choose to buy an annuity.

If you’re certain that you want a guaranteed income, now may be an attractive time to consider purchasing an annuity compared to the past decade when returns were low. However, it’s important to note that annuities are not suitable for everyone. If you value flexibility and the potential for long-term investment growth, an annuity may not be the best option. Many individuals find that a combination of an annuity and drawdown, where you can withdraw money from your pension pot, offers the best solution.

Savings Rates – Seize the Opportunity

The base rate has a major impact on savings rates. Generally, as the base rate increases, savings rates also rise, although major banks have come under scrutiny for not passing on increases to customers. Variable rate accounts tend to react quickly to base rate changes, while fixed-term accounts are usually priced based on future expectations of the base rate.

Experts suggest that the fixed-rate savings market may have peaked or be close to doing so. If you come across an attractive savings account, it’s advisable to act swiftly and take advantage of it. For example, the best easy-access savings accounts currently offer returns of 5 percent, but by committing to lock your cash away, you can secure returns of over 6 percent.

By understanding how interest rate changes affect mortgages, pensions, and savings, you can make informed decisions. If interest rates do reach their peak, tracker mortgage deals may be beneficial while annuity rates offer potential advantages. Lastly, seize the opportunity to get a good savings deal before rates potentially plateau.