UK financial chaos: a survival guide for your mortgage, savings and energy
10-02-2022
UK financial chaos: a survival guide for your mortgage, savings and energy
The pound dived and stock markets tumbled after the mini-budget – here’s what you need to know
Hundreds of mortgage deals have been withdrawn from sale over the last few days. Photograph: oversnap/Getty Images/iStockphoto
Zoe Wood, Jess Clark and Rupert Jones
The financial rollercoaster we’ve all been riding for a while took another lurching turn this week after the fallout from Kwasi Kwarteng’s mini-budget continued to cause chaos.
Mortgage deals evaporated and were in many cases dramatically repriced upwards, throwing borrowers’ plans into disarray. Stock markets tumbled and the pound tanked, while homeowners and borrowers were warned to brace themselves for a sharp rise in interest rates, and some analysts claimed house prices could fall by as much as 20%.
Here we present our guide to surviving the latest financial crisis.
Mortgages
Hundreds of mortgage deals have been withdrawn from sale over the last few days, with lenders’ systems crashing as large numbers of worried borrowers and advisers logged on and tried to get through on the phone. One mortgage expert claimed that “it’s utter carnage out there right now”.
Products were pulled because banks and building societies were struggling to price their home loans amid the rapidly changing market conditions, explains Scott Taylor-Barr, a financial adviser at Carl Summers Financial Services.
“By the time they have set up a new deal, it’s already out of date, as the underlying cost of funds is rising sharply,” he says. “This has resulted in many lenders temporarily withdrawing from the market to allow things to settle.”
However, this is only an issue for new borrowers, he says. “If your application is already in with the lender, or you have a mortgage offer, then don’t panic, as your rate is secured.”
There are just under 9m residential mortgages outstanding in the UK, of which about 75% are on a fixed rate, according to UK Finance. About 1.3m of those deals were due to end this year, and if you haven’t sorted out a new product, you might be in for shock.
A for sale sign outside houses in Brighton. Photograph: Anthony Devlin/PA
David Hollingworth, an associate director at the broker firm L&C Mortgages, says the mortgage market has been in flux all year but during the last few days it has gone into “hyperdrive”.
He says: “Fixed rates started to turn around even before the base rate moved because the markets anticipated that inflation would mean the Bank of England had to lift rates more quickly than had previously been anticipated.”
Prior to this week, his benchmark for two- and five-year fixes was “about 4%” but that is now out of date. “Things are going to keep changing for the short-term at least,” Hollingworth says. “If we look at Nationwide as a lender who, to their credit, have kept their full range available but at markedly higher rates, they put at least 1% on their two-year rates, so they’re starting around the 5.5% mark.”
The prospect of rising borrowing costs means some anxious homeowners are eager to secure a new deal before their current one expires. If this is you, tread carefully, Taylor-Barr advises.
“Generally, if you have a fixed mortgage with a lender, you also have an early repayment charge, and these are normally a few thousand pounds for most people,” he says. “Paying this to ditch your probably very low current deal, to move on to a more expensive deal, is very rarely a good move.”
About one in five households have a variable rate – either a tracker mortgage, where the rate paid is explicitly linked to the Bank base rate, or their lender’s standard variable rate (SVR).
The rate on a tracker mortgage will directly follow the base rate. With SVRs, things are less straightforward and change at the lender’s discretion. This week Halifax, the country’s largest mortgage lender, put its SVR up by 0.5 percentage points to 5.74%.
If your mortgage payments are going up and you think you won’t be able to cope, there is no point burying your head in the sand. Speak to your lender or a broker about the options, which could include extending the repayment term to bring the monthly cost down.
If you are gearing up to buy your first home, the headlines make unsettling reading, not least predictions that property prices could crash. However, Nathan Reilly, the director of customer relationships at Twenty7tec, a platform for mortgage advisers, says many lenders are still open for new applications, although the number of options are decreasing and service levels may suffer as a result.
If you have already committed to buying at a certain price, think very carefully before rocking the boat
Financial adviser Scott Taylor-Barr
“This makes buying a new property in the current climate a very personal decision, as undoubtedly there is an element of risk and uncertainty,” he says. “For those already in possession of an offer, this will remain valid but it is worth checking the length of the offer period.”
If you have secured a property, predictions of a market correction are the stuff of nightmares, and you may be considering trying to knock the price down. However, this could be high risk amid a shortage of properties to buy.
“If you have already committed to buying at a certain price, think very carefully before rocking the boat,” Taylor-Barr says. “You’ll be kicking yourself if you end up torpedoing your own house purchase for the sake of a few grand off the asking price of a property that you love.”
There is no question that confidence in the UK housing market has been shaken. “When the dust settles on the chaos in the mortgage market, the ground will have shifted, and fixed rates will have risen significantly,” says Sarah Coles, the senior personal finance analyst at Hargreaves Lansdown.
“The impact on buying power will mean some incredibly difficult decisions for homebuyers, who could end up with smaller ambitions or horribly tight budgets. For some, this will push the home they want out of reach.”
Energy bills
UK households will typically spend about £240 more on energy bills this winter alone compared with last year, despite government interventions such as the price cap freeze, which takes effect from 1 October, according to new estimates.
AdvertisementThe amount the typical customer will pay for gas and electricity has risen to £2,500 a year from 1 October, up from the previous £1,971 cap.
While the government’s decision to scrap the 80% rise originally forecast for 1 October means consumers will typically save £1,000 in total, overall, average household bills will be 96% higher than last year after the increase.
The price cap is a limit on how much suppliers can charge for each unit, which means households that use more energy could pay more than £2,500. For some bigger households living in draughty homes, it could be a lot more.
The figure is just an example of what a family with average usage might be billed and not a cap on how much households can be charged in total.
Justina Miltienyte, the head of policy at Uswitch, says: “Even if rates are not as high as they were going to be, households will still be facing an extremely difficult winter.
“Taking into account the £400 energy bill support, households could pay on average £237 more for energy over the three coldest months than they did last year – on top of hikes across other essentials such as food and fuel.
“It’s important to remember that bills are not frozen. This is a cap on the unit rate of the energy you use – it is not a cap on your final bill.
“The less energy you use, the less you will pay, so you may still be able to save money by managing your energy usage this winter.”
Britain’s households will typically spend about £240 more on energy bills this winter alone compared with 2021. Photograph: Yui Mok/PA
Alongside the government’s energy price guarantee (EPG), consumers will still receive the £400 discount on energy bills that the government announced earlier this year.
Ministers are also temporarily removing the green levies that contribute about £150 annually to the average bill.
Companies have advised customers they do not need to take any action to receive the EPG rates.
Firms will be keen to avoid a repeat of the introduction of April’s price cap, when websites crashed in a meter reading rush.
British Gas said that submitting a meter reading before the EPG starts “helps us keep your bill accurate” but that customers did not have to submit the reading until 14 October. It is looking to move customers on fixed deals who would be better off on standard variable tariffs over to the latter.
The energy firm Ovo says customers switching from a fixed to a variable tariff will not face exit fees from 1 October. It will contact customers on prepayment meters, who will receive a credit in the first week of each month.
Bulb, which remains in a special government handled administration after its collapse last year, told its customers that Liz Truss’s price freeze would “limit the impact on household costs. This means that prices won’t be as steep as we originally thought. But, unfortunately, they are still going up.”
The industry body Energy UK said high call volumes and website traffic were expected, and recommended customers check beforehand for the best way to submit readings.
The pound
UK consumers will pay more for imported food and drink, petrol and holidays abroad after the pound tumbled this week.
Sterling plummeted against the dollar after the mini-budget and is expected to remain volatile. It was worth $1.0789 on Thursday morning, though by Friday morning it was trading at $1.1101.
Depending on what happens going forward, the drop will have an impact on UK consumers, who will pay more for items such as imported groceries, wine and beer, petrol, and holidays abroad unless the pressure eases.
Shoppers may also notice products on the shelves are different as companies swap suppliers to reduce costs
UK grocers import about 40% of their food, according to the British Retail Consortium, meaning it is “inevitable” that “some of the costs will have to be passed on to consumers in the form of higher prices”.
The increase may make UK products a more appealing option in comparison, as the price of imported food and drink will be higher, says Sarah O’Connell, the consumer markets partner at PwC.
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“The UK goods market won’t be cheaper overall but certainly it will make home-sourced goods more cost-aligned relative to imported goods,” she adds.
Shoppers may also notice products on the shelves are different as companies swap suppliers to reduce costs.
One survey of UK supply chain managers found that a quarter had sourced from alternative suppliers, while more than a third have switched to different products.
Meanwhile, the AA said the cost of filling up an average family car could jump by £7.50. Wholesale oil markets are priced in dollars, which means it becomes more expensive for those buying in pounds.
Going on holiday will also become more expensive, with travellers exchanging their pounds for currencies such as dollars or euros receiving less than they are used to.
The AA says the cost of filling up an average family car could rise by £7.50. Photograph: Nathan Stirk/Getty Images
Natalie Townsend, the head of John Lewis Travel Money, says consumers with any dollars or euros they do not need should sell them now.
“Keep an eye on the exchange rates and you could have more sterling to support your day-to-day costs now, at a time when the cost of living is increasing,” she adds.
Those going on holiday soon should buy currency from a provider that has a buyback guarantee, she says, and avoid exchanging money at the airport or ferry terminal.
Savings
Many savers have benefited from the series of base rate rises over the past few months, and some might be happy to see interest rates shoot up further.
However, bear in mind that even if the latest 0.5 percentage point increase is passed on in full, the rate of inflation – currently 9.9% – is eating away at the value of people’s nest-egg cash. As investment platform AJ Bell puts it: “Despite rates rising, no savings rate can beat inflation.”
In response to previous base rate increases, savings account providers have boosted some rates, although often not in line with the Bank of England’s move, and sometimes weeks or even months later.
On Thursday this week, the top-paying easy access savings accounts from well-known providers – such as Yorkshire building society and Sainsbury’s Bank – were offering about 2%, according to the data provider Moneyfacts.
Many savers have benefited from the base rate rises over the past few months. Photograph: Brian A Jackson/Getty Images/iStockphoto
Meanwhile, fixed-rate savings bonds are looking more tempting than they have for a while: at the time of writing, Newcastle building society had one paying 4.1%.
However, the rates for locking your money away for five years were not dramatically higher: about 4.4% was the best you could get when we looked.
One bit of good news was that National Savings and Investments this week said millions of pounds more in premium bond prizes will be up for grabs from this month as a result of it increasing the “prize fund rate” from 1.4% to 2.2%.
There are more than 22 million premium bond holders, and the changes mean that the odds of each £1 bond number winning a prize will improve slightly – from 24,500:1 to 24,000:1.