Inflation data was released by the Bank of England and Kantar today, as the central bank shared how Britons are viewing inflationary risks. Generally, savers are underestimating the impact of inflation, which does not bode well for mortgage and debt holders.
Hargreaves Lansdown examined the release and noted people are far closer to knowing the inflation rate now: estimating 3.7 percent for November (CPI was 4.2 percent in October). By comparison, when it was 0.4 percent in February this year they estimated 2.5 percent.
Nevertheless, Britons are still underestimating how high inflation is at the moment. This could really hit home owners over the coming months as the Bank of England expects inflation to easily surpass five percent by the Spring.
When asked what will happen to rates, 21 percent said they expect them to stay about the same for the next 12 months, while 60 percent expected them to rise. The proportion expecting rates to rise over the next 12 months has risen from 43 percent in August to 60 percent in November.
Additionally, when asked what would be best for the economy, 25 percent of respondents thought rates should go up but these people may want to be careful what they wish for.
Sarah Coles, a senior personal finance analyst at Hargreaves Lansdown, commented on the results.
She said: “Inflation has become a pressing issue for millions of people, who are seeing prices go through the roof.
“Usually only those with a real interest in money have any idea what’s happening with inflation, but right now, millions of us know all too well how much pressure our budgets are under.
“When inflation isn’t a major concern, most people have to hazard a rough guess at what inflation might look like. It’s why in February, when CPI was at 0.4 percent, on average people estimated inflation was at 2.5 percent. But right now, with the price of everything from fuel to energy and food rising sharply, we’re well aware of just how much more things are costing us.
“We’re also much more keenly aware of the chance that a rate rise is on the cards in the not-too-distant future. 60 percent of people expect rates to rise over the next 12 months – a number that has been climbing steadily for the past year, but saw a jump from 43 percent over the past three months.”
Ms Coles also expressed worry on how many Britons are expecting and/or want rates to be raised.
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She concluded: “Some of this may be because people feel a rate rise could control prices. However, when the same survey asked people about the relationship between rate rises and inflation back in February, only just under a third were aware that higher rates could push prices down.
“There’s a real risk that people don’t realise the impact that a rate rise could have on the cost of their borrowing, and while those on fixed-rate mortgages or loans may be protected for the length of the fix, those on variable-rate deals and anyone with a credit card could be in for a nasty surprise when rates start going up.”
This could hit many families over the coming months as according to recent research from Moneyfacts, the total mortgage product choice in the residential sector has risen to its highest level in over 13 years.
Data from the latest Moneyfacts UK Mortgage Trends Treasury Report showed that as availability grew, the overall average fixed rates have continued to creep upwards this month. However, the average rates for those with smaller deposits or levels of equity have fallen, with the average two- and five-year fixed rates at a high loan-to-value (LTV) of 95 percent currently at record lows going back to 2011.
Myron Jobson, a Personal Finance Campaigner at interactive investor, also recently warned about the dangers of rising rates for mortgage holders. In early December, interactive investor released the results of a poll of 1,900 website visitors. The poll was focused on what people’s biggest fears were for their personal finances for 2022.
The results showed inflation, a stock market crash and tax increases are weighing on savers’ minds and a rate increase may be used to counteract some of these dangers. However, Mr Jobson warned of the shortcomings of this option.
He said: “Interest rates are widely expected to rise imminently to tackle rampant inflation which surged to a 10-year high in October at 4.2 percent – more than double the two percent target. Savers could be forgiven in thinking this means that the era of rock bottom savings rates could soon come to an end.
“However, while many banks and building societies were quick to pass on cuts to the base rate to savers in the past, the same might not happen to bolster savings rates.
“The market expects interest rates to be nudged slightly upwards – from 0.1 percent to 0.25 percent – but are still likely to stay low by historical standards for a long time. So, while there might be a slight reprieve in savings rates, it is unlikely to be anything to shout about. Even so, it is still worth shopping around for the best savings deal to get your money to work harder for you. Those contemplating opening a long-term fixed rate account might want to consider where they think interest rates will go in the near future as they would be unable to switch to a better payer until their fixed term has ended.”
Mr Jobson concluded by examining what could happen to mortgage holders and what should be done in response to the changes.
He said: “When it comes to mortgages, the 850,000 UK mortgage holders on a variable rate deal will feel the immediate effect of higher interest rates as their rate is linked to the Bank of England’s base rate. For those on a fixed rate mortgage deal, new interest rates don’t apply until the end of their fixed period.
“The past couple of weeks has seen the withdrawal of cheap fixed-rate mortgage deals, however, mortgage rates are still low compared to yesteryear, and there are still many competitive deals in the market. Anyone looking to buy or remortgage in the near future should consider securing a deal now. Mortgage deals are often valid for a number of months, and it is not too early to start looking for the best deals now.
“For some homeowners, funnelling some of the savings to overpay on their mortgage is a no-brainer and a great way of saving a substantial amount in interest. There are limits on how much you can overpay and there might also be charges, so you should check with your mortgage provider first.”