Inflation hits 9.4% - impact on savers and borrowers

ended 20. July 2022

This morning, it was announced inflation hit 9.4%. What will be the impact of this on borrowers, savers and investors, and what can they do to counteract it? Just a few quick lines will do.

11 responses from the Newspage community

Inflation continuing to rise makes the Bank of England raising the base rate by 0.5% in August much more likely. This would be the largest base rate rise since 1995. A growing number of people with a mortgage are considering consolidating their personal balance sheet and extending their terms to free up more disposable income as food, fuel and mortgage rates rise. Of course, people need to seek advice from their broker before doing this.
The current level of inflation is not just seeing negative real returns for savers, but means they have less to save full stop because food and petrol prices are going through the roof. It's a double whammy of pain and the only thing that's certain is that it’s going to be a difficult end to the year for a lot of people.
Savers may as well keep their cash under the mattress as keeping it in a low interest yielding bank account simply erodes the value. Speak to a financial adviser and invest, as it's the only way to keep up with inflation. For borrowers, inflation is eroding the true value of their debt and what they owe although clearly the cost of borrowing is going up. Saying that, mortgage rates still tend to be significantly lower than the current rate of inflation. It doesn't matter who you are though: the cost of living crisis for normal people is starting to hurt and it's going to get worse before it gets better.
If you haven’t sat down with a professional mortgage adviser recently, then now’s the time to do it. For most people their mortgage is their largest outgoing, so is also the route to the biggest potential reduction in monthly spend. It’s not just about getting a better rate either, could you look at extending the term, or is their a sound reason to move at least part onto an interest-only basis? Your mortgage is a more flexible financial tool than many people give it credit for.
Inflation hitting 9.4% is great news for those who borrow, as inflation effectively wipes away the real value of debt. So homeowners should rejoice, especially as interest rates are very low compared to the current high level of inflation. For savers, high inflation and low-interest rates are a disaster. As ever, cash is proving to be the riskiest investment of all, guaranteeing a negative return (loss) in real terms. Its purchasing power evaporates. One asset class gives investors a chance to protect against inflation: equities. In times of high inflation, companies can increase their prices and thus their earnings, the historic driver of share prices. Over the long term, it's a no-brainer. Sadly, when it comes to money and comprehending where the real risks lie, many people make mistakes, hence the clamour for the safety of cash, gold, or some other ghastly new kid on the block, like crypto or NFTs.
With inflation continuing its inexorable rise, homeowners whose fixed rate mortgage is up for renewal should speak to an adviser ASAP. You might be able to lock in a new rate before, as seems likely, interest rates go up again in early August. Andrew Bailey, the Bank of England Governor, is talking about a 0.5% base rate hike, with further increases likely to follow. So quick action is the order of the day. The new, less stringent mortgage affordability rules come into effect in August, which will help a little. But the days of dirt cheap mortgage rates are over.
This is yet another blow to mortgage borrowers as it places even more pressure on the Bank of England to go further in raising their base rate, with some expecting a 0.5% increase. We have already seen sizeable rises in mortgage rates and this will be a worry for anyone coming to the end of their fixed rate. Few believe that raising rates will have much of an impact on inflation, as outside factors such as energy prices and the war in Ukraine are largely to blame. The Government needs to do more, much more.
Inflation didn’t increase as much as expected, but that is no consolation for consumers. The increase will mean savings further eroded and the likelihood of further increases to the Bank of England base rate, which means higher costs for borrowers. An increase in rates will also mean growth investments could fall, as they rely on borrowing to expand and their costs will be going up.
With today's inflation figure not just a 40-year high but also above expectations, mortgage borrowers will be watching the next move from the Bank of England with interest. Furthermore, mortgage lenders may pre-empt any hike from the Bank of England so anyone seeking to secure a mortgage would be wise to lock in the rate as soon as possible.
This is great news for borrowers, provided that their pay rises in line with inflation, as the cost of their mortgages will have fallen by 9.4% in real terms. If this continues, there is an argument that home buyers should mortgage themselves to the max as they did in the 70s and early 80s, as inflation will erode the real cost of the debt very quickly. Of course, for savers, this is terrible news. Whilst deposit rates have shot up recently, they are still significantly below this level of inflation. So whilst borrowers might be cracking open the champagne, savers will be drowning their sorrows.
With inflation continuing to rise, reaching an annual rate of 9.4% this month, the likelihood of interest rates going up also continues to rise. Perhaps August could see a 0.5% increase in the Bank of England base rate. On the one hand, high inflation is actually a hidden benefit to borrowers because it erodes the value of debt over time. £100,000 of debt now falls to just £77,633 in real terms, if inflation remains constant at just 2.5% over 10 years. On the other hand, interest payments become more expensive unless you're locked in to a fixed rate deal. So if you're on a variable rate or if your fixed rate is coming to an end soon, it's time to review your options with a good mortgage broker. For savers, the opposite is true. The spending power of money in the bank is being eroded pretty quickly now. That's just something we have to accept for short-term savings and emergency funds, but for long-term investing, we must all look beyond the perceived 'safety' of bank deposits. If you've never really thought much about investing, or if you've avoided it because it sounds risky, now could be the time to invest in your future through financial coaching or financial advice.