A run of 14 consecutive interest rate rises has brought worry and financial pain for mortgage holders – but it has also boosted savers’ bank balances.
Millions of people in the UK are both borrowers and savers (while some are one, or neither), so the balance – or imbalance – between the two is important for our money.
Documents published after the chancellor’s Autumn Statement on Wednesday give a fascinating insight as to which way the scales are shifting.
This year, according to the UK’s official economic watchdog the Office for Budget Responsibility (OBR), the benefit of better returns on savings has outstripped the hit of higher mortgage rates. Our real household disposable income – put simply, the money we have to spend or save – has risen slightly in 2023.
The trouble is, that is bookmarked by a fall in this disposable income in 2022 and another forecast drop in 2024.
Last year, everyone took a hit from rapidly rising prices. Next year, an estimated 1.6 million homeowners will see their current mortgage deal expire and so will move on to a much more expensive loan.
In short, there is more pain to come.
The OBR’s view is a forecast, and it may ultimately prove to be wrong, but the OBR is the official body that marks the Treasury’s homework and its predictions carry significant weight.
Impact delayed
Much was said in recent days about tax cuts, pension rises, and even speculation about the date of a general election. However, interest rates have a central impact on our finances, and the power to set them lies with the Bank of England, not the chancellor.
After more than a decade of very low rates, they rose consistently from December 2021. That is two years now, yet, what the OBR’s outlook document tells us is how relatively resilient our collective finances have been to those increases this year.
“Rising interest rates support household incomes (on aggregate) due to the boost to savings income from higher deposit rates so far outweighing the rise in interest payments from higher mortgage rates,” it says.
In real life, this effect is not shared equally. Many millions of people have less than £100 in savings. A whopping £260bn sits in bank accounts that do not pay any interest. There is a whole separate debate about rates of tax on savings income.
Even if you are not a homeowner, then higher mortgage rates are likely to have an impact – as it has been a major factor behind rapidly rising rents.
The OBR’s figures are an aggregate, creating a risk of drawing oversimplified conclusions, but what it says next is quite clear.
It points to a rise in debt interest payments next year, as more fixed-rate mortgages face renewal. As a result, real household disposable income is set to fall.
In other words, things will get tougher – even if the Bank of England decides that it will not raise rates any further than their current level of 5.25%.