Peak interest rates are ‘nightmare’ for savers but could spare us a house price crash | Personal Finance | Finance

Consumer price growth dipped for the third straight month to 10.1 percent in January but remains at a 40-year high and the cost-of-living crisis continues to rage.

The Bank of England is expected to hike base rates at its next meeting on March 23, from today’s four percent to 4.25 percent.

Yet by the end of the year, markets expect inflation to have fallen below five percent with bank rate at 3.75 percent, and this assumption is playing havoc with our savings and mortgage rates.

Best buy savings account rates peaked last November, even though the BoE has already hiked interest rates twice then, both in December and February.

This is partly down to the big high street banks boosting their profit margins, rather than passing on higher base rates to long-suffering customers.

It’s not the only reason, though, because fixed-rate mortgages are behaving strangely, too. They are falling when most people would expect them to rise with base rates.

Banks and building societies set savings and mortgage rates not on where interest rates are today, but where they expect them to be in six to nine months’ time.

By then, they expect them to be much lower.

That’s a blow for savers but a positive surprise for homeowners.

Last November, Gatehouse Bank was offering a five-year fixed-rate bond paying 5.10 percent a year. 

Today’s best buy five-year rate from RCI Bank offers just 4.25 percent.

Banks do not want to commit to paying high levels of interest for five years as base rates could fall as low as two percent in 2024.

Savers who are keen to lock into a five-year rate will be disappointed to get a lower return but should consider accepting it anyway, said Anna Bowes, founder of savings rate tracker service Savings Champion. “Today’s fixed rate bonds may be as good as it gets.”

Some savers may be tempting by shorter two-year fixed rate bonds instead. They offer only slightly less than five-year fixes, with RCI Bank paying 4.20 percent.

Under normal circumstances, banks reward savers for committing to a longer lock-in period. These are not normal circumstances.

Two-year savings bonds look good value but are likely to mature at a point when interest rates are much lower than today, leaving savers scratching around for a decent return. 

So a best buy five-year fixed-rate bond may work better for those who don’t need their money in that period.

The last year has offered some relief for savers after years of near-zero returns, although rampant inflation has still been eroded the value of their deposits in real terms.

Many will be hugely disappointed to discover savings rates are now falling, and much faster than inflation.

There’s better news for mortgage borrowers, though.

READ MORE: Savings expert gives shoutout for Cash Isa paying ‘table topping’ 4.2%

Mortgage rates went berserk in the aftermath of former Chancellor Kwasi Kwarteng’s disastrous mini-Budget last September, rocketing from two percent to peak at 6.43 percent.

Yet they have fallen sharply since.

On Thursday, Nationwide cut the rate on its five-year fixed rate remortgage to 3.99 percent, which incredibly, is cheaper than its two-year tracker which charges 4.24 percent.

Lenders anticipate that over five-year interest rates will be much lower than today and are slashing rates to win business as the housing market slows, said Martese Carton, director of mortgage distribution at Leeds Building Society. “They are keen to hang on to market share and this will drive fixed rate pricing down still further.”

This will come as a huge relief for many who feared losing their home as mortgage rates rocketed.

Lower mortgage rates should also help prevent a house price crash, in a boost for the wider economy.

A five-year fixed rate mortgage also gives borrowers the peace of mind that comes with knowing exactly how much they will pay each month for a set period. 

Yet by next year, a four percent mortgage rate may look expensive and some homeowners may do better by taking out a variable rate tracker mortgage instead, even if it costs a little more today.

If base rates fall, so could their repayments.

As ever, there are no guarantees. Nobody can say for sure where inflation or interest rates will go next.

Picking the right savings account or mortgage is trickier than ever, as banks position themselves for a drop in inflation that hasn’t actually happened yet.