Dean Butler, Managing Director for Customer at Standard Life said: ‘It’s not a 0.5% leap this time but the Bank’s 14th rate rise in a row will pile on the pain for the significant minority of retirees and those approaching retirement who still have a mortgage to pay off, particularly if they’re on a variable rate or hold one of the 2.4 million fixed deals set to end before the end of 2024. Landlords might also pass costs on to renters, when permissible. The speed and severity of the changes have been good news for savers looking to keep up with high inflation, however many retirees or people approaching retirement fall on the flip side of rate rises and will now find themselves struggling and having to reassess their plans.’
Home ownership and retirement living standards
‘Most estimates of the savings you need to live comfortably in retirement, including the Pensions and Lifetime Savings Association (PLSA’s) Retirement Living Standards, assume no housing costs – however, this is not the case for all. Analysis of government figures this week found 450,000 over 65s are still paying off their mortgages in retirement. Levels of home ownership are falling and many people are also taking +30 year mortgages so more people will be approaching retirement with housing costs – in potentially a long-term higher interest environment.’
Interest rates and retirement planning
‘People who were planning to retire in the near future but still have mortgages or other debts face a tricky decision as the cost of borrowing continues to rise. The State Pension by itself isn’t enough for a comfortable retirement even without housing costs or other debts, and many don’t have enough saved in private pensions to bridge the gap. If you’re wondering what to do next it’s always worth taking advice if at all possible, speaking to your pension provider or your HR department at work, or using the Government’s free Pension Wise guidance service.’
Chris Arcari, Head of Capital Markets, Hymans Robertson, said: “With headline and core inflation running at 7.9% and 6.9% year-on-year, respectively, the Bank of England was fully expected to raise rates at today’s meeting. However, following June’s downside surprise in inflation figures– with both headline and core inflation falling more than expected – the Bank of England stepped back down to the more “usual” 0.25% p.a. rate rise today, taking the base rate to 5.25% p.a. Ahead of the announcement, markets were split between whether the BoE would raise rates 0.25% p.a. or 0.5% p.a..
“Given the more labour-intensive nature of the service sector, the BoE keeps a keen eye on UK CPI services inflation, which rose 7.2% year-on-year in June. The BoE is concerned that strong service-sector price growth is being underpinned by strong nominal wage growth, which rose 7.3% year-on-year in the 3 months to end May. Against this backdrop, the market is pricing in the BoE base rate will rise to around 6% p.a. early next year.”
Sarah Pennells, consumer finance specialist at Royal London said: “Given the recent news of lower inflation hard-pressed mortgage holders will be disappointed that the Bank of England didn’t leave the base rate untouched. With the speed at which interest rates had been rising, the higher repayment amounts, for some, will be unaffordable or a huge stretch on their finances.
“While those on a tracker rate have seen repeated mortgage rate rises since the end of 2021, the impact will be more keenly felt for those on fixed deals who are looking to remortgage. Rates were at historic lows on two-year fixes in summer 2021 and the majority of borrowers, whose deal is coming to an end in 2023 fixed at below two per cent, meaning they will be faced with considerably higher monthly mortgage payment amounts.
“Someone with a 25-year repayment mortgage with an average outstanding balance of £127,420 would be paying an extra £390 a month, based on the average two-year fixed rate mortgage today, compared to the average two years ago. That’s a massive £9,350 over the two-year term.
“If anyone is worried about their mortgage or struggling, they should contact their mortgage lender or mortgage adviser as soon as possible. There’s a range of measures in place to help mortgage customers, and the earlier you ask for help, the sooner you may be able to access the support.”
“Royal London’s cost of living research conducted earlier this year** found that 30% of UK consumers were already moving into their overdraft or needing to borrow funds before the end of the month to make ends meet, so further increases in mortgage costs will be a huge concern for many hard-pressed borrowers.
“Although savings rates have been getting higher, they have not kept pace with the rises in the Bank of England base rate. Given the Financial Conduct Authority’s 14 point action plan announced this week, savers will be hoping that they will see much improved rates to the savings products on offer. With the potential for rates to get more competitive, it’s vital that savers shop around to see what options are available to. Banks and building societies attract new customers with their best rates, so it could be worth moving your savings to another provider if it would earn more interest.”
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