What higher interest rates mean for your money

This is an audio transcript of the Money Clinic podcast episode: ‘What higher interest rates mean for your money’

Claer Barrett
Hey, Money Clinic listeners, it’s Claer Barrett here. We’re keen to hear more from you, and we want to know what you would like to hear more of. So we’re running a survey, which you can find at FT.com/moneyclinicsurvey. It takes around 10 minutes to complete, but you will be in line to win a pair of Bose QuietComfort earbuds. So don’t hold back. We want to know what you think and you can find another link in today’s show notes.

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Interest rates are on the up. Last Thursday, the Bank of England increased the base rate by half a percentage point to 4 per cent. Symbolically the highest level the UK has seen since the 2008 financial crisis. So what does it mean for you and your money?

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Welcome to Money Clinic, the weekly podcast from the Financial Times about personal finance and investing. I’m Claer Barrett, the FT’s consumer editor.

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In this episode, we’ll be exploring what the hike in interest rates means for your savings, your investments and the property market. Plus, whether the UK economy will manage to avoid a protracted recession, something that could weigh on your ability to secure a pay rise, promotion or land your next job move. Rising interest rates impact our personal finances in all kinds of different ways. And on today’s show, we have not one, not two, but three experts ready to supply some news you can use for your investment savings and for those of you nervously eyeing the mortgage market. Getting inflation under control is a problem for central banks around the world. And there have been a series of rate rises in the US and Europe as well as the UK as they battle rising prices. Later, we’ll get a steer on the outlook. Where are we heading with all of this? But first I’m joined in the studio by Helen Saxon. Helen, would you like to introduce yourself?

Helen Saxon
I’m deputy editor at MoneySavingExpert.com. You know, big personal finance website. We look at savings along with anything else to do with your personal finances.

Claer Barrett
Well, Helen, thanks for joining us in the studio today. It’s great to have you here. Now, we’ve seen interest rates rise in the last couple of days to 4 per cent. Good news for savers?

Helen Saxon
Yes, if they’re getting a rate there or thereabouts because many won’t be. You know, if you haven’t touched your savings in a long time, you might look at it and you might be paying . . . be being paid nought point five or nought point seven five. And some might even be paid nought point nought one or nought point one. So yes if you’re chasing the rates in that they are better than what you could have got. However, you know, we do sometimes see rates being a bit sluggish to catch up to the base rate. For example, the top easy access rate at the moment is just over 3 per cent. So actually behind base rate.

Claer Barrett
Yeah. So if you want to get the best rate, you’ve got to move your money. Now let’s chat through some different types of savings accounts, how they work and where the best deals currently lie. So should we start off with easy-access savings accounts? What kind of things are they good for and what are the best rates?

Helen Saxon
So easy-access covers a range of things, but at its very basic level it does what it says on the tin. It’s a savings account that you can put money into when you like, take money out when you like.

Claer Barrett
Now the quid pro quo, of course, is if you get immediate access to your money, then you’re not going to get the best interest rate on the market. But what kind of interest rates could people get on the best easy-access accounts?

Helen Saxon
So at the moment it’s about 3.05 per cent and that’s from a range of providers. Tandem just went to that last week. With them it’s a 2.85 base and you can add a 0.2 bonus on top.

Claer Barrett
Wow.

Helen Saxon
There’s Kroo Bank, one of these new app-based banks.

Claer Barrett
Yeah. This is Kroo. Like a pigeon’s “Kroo!” 

Helen Saxon
K-R-O-O. Yes.

Claer Barrett
Yeah.

Helen Saxon
And they’re offering 3.03 on their current account. So essentially you open the account through the app and then anything in it you get 3.03 on.

Claer Barrett
You just use it like a savings account. Now, savings bonds are a bit different. How do they work?

Helen Saxon
So with these, you choose a term that’s usually anything from six months to five or even seven years, and you lock your money away for that time. So let’s say you chose a one-year bond. You generally have a couple of weeks to get your money into it, and then it would be closed either till a year after you open it or until a particular maturity date, at which point you get your money back, plus the interest.

Claer Barrett
And then some of them will have some kind of ‘piggy bank break’ clause, if you like, where you could get the money back in an emergency, but you’d forfeit the interest. But for most of them, you had to wait until the term ends.

Helen Saxon
Yeah, it’s . . . very, very few have that on savings bonds. If you need access, you’re better on a fixed ISA because they have to give you your money back.

Claer Barrett
And the kind of interest rates on fixed bonds, what’s been happening on those?

Helen Saxon
If you’re looking for a one-year fixed, you could get around 4.15 at the moment. It doesn’t actually go up much. The longer you fix, you know, the best five-year fixed it just 4.45. So there’s not much of a premium for fixing longer though obviously, you know, if that’s an acceptable rate to you, that is then fixed for those five years. So you would be guaranteed that.

Claer Barrett
So if we do see the Bank of England rate tick down, then in a year’s time, if you fixed for two or three years at 4 per cent and you don’t need the money, then it could be the right decision for you. But now let’s come on to regular savings accounts. So these weren’t really much of a feature of the savings market until perhaps ten years ago. They’re perhaps more of a perk to get us to switch bank. But tell us a bit about them, Helen, how they work.

Helen Saxon
So, yeah, regular savers. They often or at least a lot of the best ones come if you’ve got access to that particular bank’s current account. So for example, First Direct at the moment is paying 7 per cent on its regular saver. To access that, you need a First Direct current account. And then if you have that, you can open the regular saver and you can save between . . . I think it’s 25 and £300 a month and you will get 7 per cent on that. Now obviously the thing to note about these is that only the first month’s payment is in for the entire year, earning you 7 per cent. The last month’s payment is only in for a month. So, you know, you’re probably getting a rate about half that. If you kind of work it out.

Claer Barrett
Yeah. You could end up with £3,600 plus interest, but you’re not going to get 7 per cent interest on the whole lot. But quite a lot of banks are doing 4 per cent, 5 per cent on the regular savers. Lloyds, TSB, Halifax. I think, well you’re the expert. (Laughter)

Helen Saxon
Yeah, yeah, all of those. HSBC as well have a 5 per cent. So yeah, most of the high street banks do one of these. So do have a look if yours does.

Claer Barrett
Now, one danger for those lucky Money Clinic listeners who are higher earners is that if you’ve got a lot of cash savings and you’re earning a good interest rate, you could end up having to pay tax on the interest on your savings. Unless of course you use cash ISAs.

Helen Saxon
So obviously cash ISAs have been around, I think since the 90s, but essentially they’re a tax-free savings account and with cash ISAs they act very much like normal savings. The big difference is that all the interest is tax-free and it doesn’t count towards your personal savings allowance. So you know, if you don’t get a personal allowance or you’ve reached it with other savings, then a cash ISA is a really good place to put excess money because it means you will shelter that interest from the tax.

Claer Barrett
And again, you can get easy-access cash ISAs and you can get ones where you lock up for a fixed rate normally every year. What are the best rates?

Helen Saxon
So again, easy-access cash ISAs, your VAT just over 3 per cent or just under depending on which one you go for. There is, I think, Newcastle 3.05 per cent and then there’s a couple at 2.85. If you go for a fixed, we often find that, you know, with the savings bond you get slightly more interest than in the equivalent fixed-cash ISA. So at the moment the top one-year is from Barclays at 4 per cent, although if you’re not a Barclays customer, you have to open that one in branch. And we’ve heard, you know, quite a lot of people say my next appointment is March or whatever. So maybe 3.8 on the next best buy.

Claer Barrett
Now, none of the rates that we’ve talked about are higher than inflation, which is still sticking over 10 per cent quite stubbornly. Now, if inflation starts to fall, it’s still worth switching your savings to one of the rates that you’ve talked about.

Helen Saxon
Yeah, and to be honest, even if it isn’t because, yes, there’s a big difference between 10 per cent and 3 per cent. But, you know, there’s an even bigger difference between 10 per cent and nought point five per cent. So, you know, if you haven’t looked at your savings for a long, long time, you might be getting that or even lower. So do what you can to mitigate the impact. Yes, technically all savings are losing at the moment, but what you are holding in cash at least get the best rate on that to mitigate some of the impact.

Claer Barrett
Now finally, Helen, in Parliament this week, the heads of various UK banks and building societies are going to be grilled by the Treasury select committee of MPs about this eternal problem. They were quick to pass on interest rate rises to people who’ve borrowed money, but they’re not so fast to pass them on to savers who are diligently saving money. What’s your take on this?

Helen Saxon
I think there’s a few things at play here. Though, there’s competition, for one thing. You know, if you go to best buy tables on Money Saving Expert or indeed anywhere else, you know, unless you’re really into new banks and all this, you might see a lot of names and you’re like, “I don’t know any of these banks,” you know, because a lot of them are fairly new and these are the ones that tend to offer the top rates, the ones that trouble the best buy tables. It’s very rare to see a Santander and HSBC outside of these regular savers. So I think it’s competition and it’s also where banks can get their funding from. You know, a lot of the newer banks or the lending banks, this might be one of the main places that they get funding to then lend out.

Claer Barrett
Mmm.

Helen Saxon
Whereas, you know, if you’ve got a high street bank, for example, they tend to have a lot of balances in current accounts. They’re pretty sure they’ll get those every month after you get paid. They’ll know how much you’ll have in your account, you know, day to day. Most of us are quite predictable people. So they actually have a decent fund that they can lend out and they don’t actually need to go, “Right, I’m going to offer 3 per cent on my easy-access saving”.

Claer Barrett
No. Helen, thanks so much for joining us in the studio today. We will definitely have you back on Money Clinic in the near future.

Helen Saxon
Thank you.

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Claer Barrett
Next up, what the rate rise means for you and your mortgage. And on hand to help with that, the FT’s James Pickford is here in the studio with me. James, tell listeners a little bit about what you do here.

James Pickford
I am the deputy editor on FT Money and I write about mortgages and property.

Claer Barrett
Well, James, I’m sure there’s plenty of people listening who are sweating because they’re coming near to the end of their fixed rate. More than a million people in the UK are going to do that this year. And on average, the kind of interest rate hike that they’re looking at between current deal and the next deal is going to be around 3 percentage points higher, which could add hundreds of pounds on to their monthly bills.

James Pickford
That’s right. And those figures are going to be peaking, the Bank of England thinks, in the second quarter with over 300,000 people having to refinance their mortgage from a sort of around 2 per cent interest rate suddenly hitting 5. So these are the people for whom, you know, there’s been a lot of talk about a mortgage payment shock. Those are the people in line for that.

Claer Barrett
OK. So let’s talk about the numbers. There are people listening saying, “Tell us the best rates, James.” Now, the average rates on the market now for a two- and a five-year fixed are what?

James Pickford
So Moneyfacts, which looks across the markets is saying that the average two-year fixed rate mortgage is about 5.44 per cent. And that’s come down literally in the last three weeks from 5.77. So there’s a lot of change at the moment and that’s a two-year fixed. For five-year fixed it’s 5.2 per cent. So these things are changing incredibly quickly because what they call that turnover rate of products, the amount of time that a deal stays on the market, is currently 15 days.

Claer Barrett
Fifteen days!

James Pickford
. . . which is its joint lowest record ever. So it is quite tricky if you’re deciding whether to fix. You know, do you wait for things to fall if you think things are gonna fall further?

Claer Barrett
Mmm. And also those fixes, five and a half, 5 per cent. It sounds high, but in October the average was around six and a half per cent and these are the average rates. So if you’ve got a lot of equity in your home, by which I mean the value of your loan is quite small in relation to the value of your property, you could actually get a much lower rate on your next fix.

James Pickford
That’s right. So if you’ve got the lowest LTV, loan to value band is 60 per cent, so that’s the best bet for a lender. If you’re a borrower with 40 per cent equity or more, then some lenders will give you a two-year fixed at 4.4 per cent. And I should at this point explain there’s this . . . there’s another oddity at the moment, which is that two-year fixes are more expensive than five-year fixes, and five-year fixes are more expensive than ten-year fixes.

Claer Barrett
OK.

James Pickford
Which is the reverse of, you know, what we’ve had over the past ten years plus. And that is because of this uncertainty over the long-term course of the future of inflation and inflation coming under control. It looks better over the longer term than it does over the short term.

Claer Barrett
OK, James, I’m going to stop you there and give some context. Because while the Bank of England raised rates last Thursday, Andrew Bailey, the governor of the Bank of England, had this to say about where inflation is heading.

Andrew Bailey
I’m gonna start with the outlook for inflation. Since the November monetary policy report, we’ve seen the first signs that inflation has turned the corner. And we think it will continue to fall this year and more rapidly in the second half of the year.

Claer Barrett
Now, James, on the one hand, we can hear the Bank of England’s economists certainly think that inflation is maybe gonna come down more quickly than they previously thought. But on the other hand, they’re still pushing up interest rates. So what should people with a mortgage make of all this?

James Pickford
Brokers I’ve spoken to have said that they would expect as a result of this move by the bank, up to 4 per cent. It’s not so much the move up to four, but the accompanying comments about brighter conditions to result in a five-year rate under 4 per cent in the coming days. And that could be as soon as this week. It could be in the next few weeks.

Claer Barrett
Well, I have to say it’s nice to have some good news about mortgages on the podcast because as people’s biggest single monthly outgoing, the amount of worry that there is, even with colleagues of ours in the office over knowing that they’ve got to refinance, are coming to the end of the deal. The fear and the stress about how much it could cost is keeping a lot of people awake at night. Now, if listeners are among that group and they’re coming to the end of a fixed rate, can you offer some practical tips for how they could find the best deal for them?

James Pickford
It is gonna be still pretty painful because obviously things are going in the right direction in the mortgage market. But those rates are still a lot higher than they were, you know, two years ago or even a year ago. So you’re gonna be paying a lot more.

Claer Barrett
But not as much as you would have been . . . 

James Pickford
Not as much as you would have been had you fixed for five years in October. In terms of tips, yeah, there is this challenge. If you like a five-year fixed, then do you fix now for five years, if you think that rates are going to be coming down quite soon or, and this is something that some brokers suggested for some people, you stick with a variable rate for a little while and then fix as soon as you think that works for you? That’s a calculation about whether you’re going to be ending up paying more on that variable right now than you would be fixing for five years, two years or whatever.

Claer Barrett
And the vari . . . the average variable rate is nearly 7 per cent.

James Pickford
Exactly. So that . . . this is one of those moments when it is probably worth going to a broker to make that calculation because it isn’t always straightforward and there will be individual circumstances. And I do recommend you, when you’re looking at these best buy mortgages, particularly on fixed rates, you look at fees as well, because I mentioned 4.4 per cent, two-year fixed rate on a 60 per cent LTV. That came with a £1,200 fee . . . 

Claer Barrett
Phew!

James Pickford
 . . . which is, you know, if you have to pay that again in two years’ time, that’s gonna make a difference.

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Claer Barrett
Thank you very much, James. That’s James Pickford of the FT. Now, let’s go to my final guest today, the FT’s markets editor and Money Clinic regular Katie Martin, who is joining me down the line. Hello, Katie.

Katie Martin
Hey, how are you doing, Claer?

Claer Barrett
Very well. It’s always great to have you on the show, even more so at a time when markets are jumping around. Now, we heard a clip of Andrew Bailey, the head of the Bank of England, earlier on, saying that he thinks inflation is getting to the stage where the bank is able to get it under control. But is the market agreeing with him on that?

Katie Martin
Yes, central banks are in a bit of a funny spot at the moment. There are some signs that inflation is coming off a hard boil and central bankers have to recognise that. But they don’t want to give the impression that it’s, you know, unfurl the banner: “Mission accomplished. Nothing to worry about here.” The market is in a bit of a funny place because some people have got ahead of themselves and have started thinking, “Well, if inflation is coming off the boil, maybe it’s not so long until interest rates start falling again and central banks start cutting really hard, just like they’ve raised rates really hard over the past year or so.” That feels somewhat optimistic and possibly ill-founded. But that’s why policymakers, people like Andrew Bailey, are in a bit of a tricky spot.

Claer Barrett
Yeah. And Andrew Bailey, I mean, he always sounds quite serious and morose, doesn’t he, whenever he talks, but he was somewhat less gloomy than he has been recently about the UK’s economic prospects. But as you say, that didn’t stop him from cranking up rates by a full half per cent.

Katie Martin
Yes. And now the UK is in a slightly different position to some of the other really big economies. The UK economy has not sprung back as quickly as, for example, the US.

Claer Barrett
I wonder why.

Katie Martin
I don’t know, Claer. If you’ve got any suggestions, write them on an email to Claer, not to me. (Laughter)

Claer Barrett
But we’ve got the Brexit effect, we’ve got the pandemic effect, and we’ve also got the cost of living crisis effect, being a consumer-driven economy.

Katie Martin
Yeah.

Claer Barrett
If people haven’t got money to go out and spend because they’re trying to save, because they know their mortgage rates are going up, for example, some of the things we’ve talked about today — that’s going to have an effect on how fast the UK economy could grow.

Katie Martin
Yes, and look, it does look like interest rates in the UK, they probably haven’t stopped rising just yet.

Claer Barrett
Hm-mmm.

Katie Martin
And if you are baking in the idea that rates are going to fall in the UK sometime soon, then best of luck with that. But you know, it does look like they are peaking and you know, there’s a sticker shock element to mortgage bills, right? When you renew your mortgage and you’re told this is going to be significantly more expensive than the last deal we cut for you. And that’s horrible for household finances. But there is a point at which you kind of get used to it being at a new level. And so the shock of that adjustment to a higher price wears off. So there might be a period where just the rate of the pace at which mortgages are getting horribly more expensive does start to moderate. And that will help. But the idea that the UK is out of the woods in terms of inflation or that it’s on a massive upswing in terms of growth, is . . . it’s a very brave assumption. We do have the cost of living crisis. We do have strikes because of the economy.

Claer Barrett
We do.

Katie Martin
You know, you only have to look around to see what’s going on in the UK at the moment. And yes, Andrew Bailey . . . all central bankers are in a tricky spot. He’s in possibly the trickiest of all of them.

Claer Barrett
Mmm. Now, while I’ve got you on the line.

Katie Martin
Yeah.

Claer Barrett
 . . . the FTSE 100, the index of the UK’s 100 biggest companies listed on the stock market in London, it broke a new record last week.

Katie Martin
Hurrah, yeah.

Claer Barrett
Now, could you explain how this is so, (Laughter) when the UK generally is kind of looked down upon by lots of global economists at the moment.

Katie Martin
The thing about the FTSE 100 is that it’s not really a UK index, You know, it’s not the best measure of the health of the UK economy. It’s chock full of global companies. It’s chock full of companies that earn their revenues in dollars and other currencies. And it’s also chock full of companies that make their money out of digging things out of the ground. You know, those are really big kind of commodities and to the UK market. So, you know, to the extent that sterling is a lot weaker than it was before the Brexit referendum, you know, that helps in terms of the currency translation and that helps the FTSE 100. There is an element of the strong demand for commodities, particularly as China comes back on stream that is helping a lot of those companies. You look at some of the revenues, some of the profits, the oil and gas companies at this moment.

Claer Barrett
Oh, yes.

Katie Martin
Just bananas. And so that all helps the Footsie. But does it give, you know, does it sound the all clear on the UK economy? No, I’m afraid not.

Claer Barrett
Now, Katie, I know that your crystal ball was sadly lost in the FT’s last office move, but we’ve had a bit of an unpredictable start to the year for markets. What kind of scenarios should investor listeners be prepared for, do you think, in the months ahead?

Katie Martin
What I’m hearing from professionals in the market is that the scale of the rally that we’ve seen since the back end of last year, based on this idea that inflation is calming down, is somewhat overdone. I think it would be wise to expect either a pullback in risky markets like stocks or at least for a period of relative stability. We can’t keep rallying like this until we’ve really got a better sense of where inflation is and what the growth outlook is. I think it’s going to be a really choppy year while we see this kind of dance between central banks and the market where we see this, you know, this tangle around inflation unravel. It’s going to take a long time before people can really feel confident that the, you know, the worst is over. So I know it’s a cop-out, but my strong prediction is volatility. This is not going to happen in a straight line.

Claer Barrett
Well, thanks so much again, Katie, for joining us. Always a delight to have on the podcast. And thanks too to our other guests today, James Pickford from the FT who was talking to us about mortgages. And Helen Saxon from Money Saving Expert who, of course, was talking to us about saving money.

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That’s it for Money Clinic with me, Claer Barrett, this week. And we hope you like what you’ve heard. If you did, spread the word and leave us a review. We’re always looking to chat with people about their money issues for the show. So if you’re interested in being part of a future episode and want some expert money advice, drop us a line: money@ft.com. You could also take a peek at our website: ft.com/money. Grab a copy of the FT Weekend newspaper or follow me on Instagram. I’m @ClaerB. 

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Money Clinic was produced in London by Persis Love. Our sound engineer is Breen Turner and our editor is Manuela Saragosa. You heard original tunes this week by Metaphor Music. And finally, our usual disclaimer: Money Clinic podcast is a general discussion around financial topics and does not constitute an investment recommendation or individual financial advice. For that, you’ll need to find an independent financial adviser. That’s all the small print for now. We’ll see you back here next week. Goodbye.