Impact On UK Mortgages And Savings With The Drop Of Inflation

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By Brett Hurll  

In the evolving financial landscape, recent trends indicate a potential shift in mortgage rates and savings outcomes, as influenced by the latest inflation figures from the Office for National Statistics (ONS). The Bank of England, having raised its base interest rate 14 times since late 2021, currently maintains it at 5.25%. However, projections from Morgan Stanley, suggest a possible decrease to 4.25% by the end of 2024.

Homeowners might see a reduction in mortgage rates if the trend of declining inflation continues. Data from Moneyfacts, a financial information firm, shows a decrease in mortgage rates from their peak in July, with the average two-year and five-year fixed rates currently at 6.21% and 4.9%, respectively. Simon Gammon of Knight Frank Finance anticipates further cuts to fixed-rate mortgages in the near future, influenced by the ONS's inflation data.

The potential for interest rate reductions is also impacting investor sentiment. Despite the Bank of England Governor Andrew Bailey's perspective, market expectations are tilting towards an earlier rate cut, possibly by next summer. This change in outlook has caused a relaxation in swap rates, which are crucial in determining fixed-rate mortgages. Ashley Thomas from Magni Finance predicts that five-year fixed-rate mortgages could drop to around 4% by year-end if inflation significantly declines.

On the savings front, the scenario is mixed. While high interest rates have favored savers, rampant inflation has diminished the real value of cash savings. Competition among banks and building societies for top spots in savings rates is waning, with many top-rate deals being withdrawn in anticipation of falling interest rates. For instance, Metro Bank currently offers 5.22% on its easy-access account and 5.91% on a one-year fixed-term account.

However, these attractive rates pose a tax implication for savers, as many might exceed their personal savings allowance, which stands at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers. In contrast, cash ISAs, which are tax-free, are gaining popularity despite traditionally lower rates compared to standard savings accounts. Gatehouse Bank currently leads with a 5.15% rate on its easy-access ISA.

This dynamic financial environment underscores the interconnectedness of inflation, interest rates, and their cumulative impact on mortgages and savings, highlighting a period of adjustment and anticipation for both borrowers and savers.