Savings Lift Helps Blunt UK Household Mortgage Pain 

The Bank of England’s interest-rate increases are benefitting savers more than they’re costing mortgage payers — for now at least.

(Bloomberg) — The Bank of England’s interest-rate increases are benefitting savers more than they’re costing mortgage payers — for now at least.

A Bloomberg analysis of data from the central bank indicates that UK households are on aggregate about £10 billion ($12.7 billion) a year better off as a result of a jump in interest rates. While those rates will feed through in time to mortgage payers, it’s savers who are enjoying a more immediate increase in income.

The findings help explain why BOE Governor Andrew Bailey and his colleagues are struggling to tame the highest inflation rate among Group of Seven economies. 

Policymakers have lifted rates at the quickest pace in three decades to rein in spiraling prices, but the mechanism designed to slow household spending is working more slowly than in past cycles because so many mortgages are on fixed rates that have yet to expire.

“The effective interest rate on the stock of bank deposits has risen more quickly than the effective rate on the stock of debt, because over 85% of the stock of mortgages is fixed-rate,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics. 

Those conclusions call into question government concern that banks have been too slow to pass on rate increases to savers. Top executives from Lloyds Banking Group Plc, HSBC Holdings Plc, Barclays Plc and NatWest Group Plc are expected to attend a meeting on the issue this week at the Financial Conduct Authority, the Financial Times reported Tuesday.

At current interest rates, savers collectively are earning £24 billion more a year than in November 2021, a month before the BOE began its most aggressive rate-hiking cycle since the late 1980s. Mortgage borrowers are paying £14 billion more in debt interest.

Anecdotal evidence also suggests that in aggregate consumers are net beneficiaries from higher interest rates at the moment. Respondents to GfK’s June consumer confidence barometer said their personal finance situation had improved sharply last month, despite the surge in mortgage rates.

However, the reprieve for homeowners will be short lived. Resolution Foundation, a research group, has warned of a £5 billion mortgage crunch next year as around 1.5 million fixed deals come to an end.

The data suggests interest rates may not be as effective a monetary policy tool as they were in 2008, when the stock of mortgage debt was considerably larger than bank deposits. Now the reverse is true after savers added around £200 billion to their accounts during the pandemic when opportunities to spend were limited.

“The income effect over the next year is probably positive,” said Simon Ward, economic adviser to Janus Henderson Investors. While some households will be in financial distress due to rate rises, others – including the wealthy and many pensioners — will be better off. 

Ward added that higher rates also discourage spending by promoting saving, and that overall spending could still be lower as the impact on borrowers tends to be larger than on savers. Savers on the best deals cannot access their cash for a fixed period but may be willing to spend other income due to the wealth effect of better returns.

The average mortgage rate on the stock of loans has risen from 2% in December 2021 to 2.82%. However, new 2-year fixed mortgage deals can cost over 6%. Fixed rates on savings have risen from under 1% to over 3%.

With banks now earning a risk-free 5% by putting money on deposit at the BOE, Martin Lewis, the consumer champion and founder, has attacked lenders for ripping off customers by failing to pass on rate rises to easy access accounts. 

“Some big banks pay under a pitiful 1% while most people should be earning at least 4%,” he said last week. Chancellor Jeremy Hunt has now ordered banks to pass on rates to instant access savers.

Bloomberg Intelligence calculated in May that about 40% of the changes in interest rates since late 2021 have been passed on to savers. The analysis was carried out before the latest 50 basis-point rise and using deposit data for March.

Separate analysis by Deutsche Bank shows that British households have barely dipped into the savings they tucked away during Covid lockdowns. While households in most of the developed world have been running down excess savings — the amount over and above pre-pandemic levels — those in Britain have maintained theirs and are now generating bigger returns on their stockpiles.

UK excess savings climbed to over 11% of GDP by the end of last year. By contrast, households in the US have completely depleted their stockpiles.

A report from UBS found that a minority of households will shoulder the burden of rate rises because fewer have mortgages than in past cycles.

“The share of households owning a house with a mortgage has indeed been on a declining trajectory and stood at 26% in 2021,” Anna Titareva, an economist at UBS, wrote in a note. She found 37% of households own a house outright. 

While 1.4 million are due to remortgage this year, that represents only a fifth of all households with a mortgage and 5% of the total number of households, UBS said.

–With assistance from Andrew Atkinson.

(Updates with UBS in final paragraphs and details of FCA meeting)

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