UK interest rate rises to 4.5% – what it means for mortgages and annuities

Stubborn inflation has forced the Bank of England (BoE) to raise interest rates to 4.5%. It’s the 12th consecutive hike and takes us to levels we’ve not seen since the 2008 financial crisis.

Rate rises tend to mean opportunities for anyone considering buying an annuity. However, they’re the thorn in the side of anyone with a variable mortgage, or heading towards the end of a fixed-rate deal.

Here’s a closer look at what it could mean for you.

This article isn’t personal advice. If you’re at all unsure, seek advice.

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What the interest rate rise means for mortgages

Sarah Coles, Head of Personal Finance

For anyone on a variable-rate mortgage, there’s no let-up. After 12 consecutive rises, if you’ve been on one of these deals for a while, you’ll really be feeling the pain. If you were on a £200,000 tracker mortgage over 25 years, at 5%, and all of this rise was passed on, a 0.25% hike could cost an additional £29 a month – at £1,199.

Fixed-rate mortgage providers, meanwhile, have been busy pricing in a rise over the past couple of weeks. The average two-year fix has risen very slightly back above 5.3% and the average five-year fix has bumped up gently to above 5%.

It’s hardly a hike to write home about and puts us back to roughly where we were in the second half of February. However, it means that aside from small fluctuations, after months of gradual reductions, mortgage deals haven’t really fallen for the last couple of months.

We’re still expecting them to end 2023 at a lower level. But clearly the fall in mortgage rates is going to be slow and lumpy until we get BoE cuts – which might not be until 2024.

For anyone hoping that cheaper mortgages would power optimism in the property market, this isn’t great news.

It means anyone considering getting a mortgage with a small deposit, or even a 100% mortgage, needs to think very carefully about how they would cope if property prices fell and pushed them into negative equity. A short-term dip accompanied by long-term home ownership doesn’t have to be the end of the world, but you need to be realistic about what you might be getting into.

For those on variable deals, who are wondering whether to fix, this makes things even more difficult.

Holding on has been increasingly expensive, and fixed-rate deals have hardly been plummeting in the interim. Some people have room in their budget and a willingness to take a risk, so will be comfortable facing the possibility of one more rise in the hope of falls further down the line. For others, the slow pace of fixed-deal mortgage rate falls will be enough to tip the balance, so they might well give up waiting and take the plunge.

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What the interest rate rise means for annuities

Helen Morrissey, Head of Retirement Analysis

Today’s rate hike could spell further good news for people looking to secure a guaranteed income in retirement.

After years of rock bottom incomes quoted for annuities, the rising interest rate environment has contributed to a much more buoyant annuity market. Annuity incomes are up almost 20% on this time last year.

Annuity rates are affected by, among other things, the yields on long-term government bonds as well as interest rates. While we’re likely to see intrigue in annuities persist for the foreseeable future, it’s not a guarantee. Annuity rates could be higher or lower in future.

Shopping around can help you get the best deal. If you’re 55 or over, you can compare quotes from all UK annuity providers on the open market with our online tool. The options you choose can impact the annuity income you get. Consider your options carefully as once your annuity is set up it can’t be changed.

Get an annuity quote today