Homeowners have been issued a major warning as interest rates soar. (Image: Getty)
The conflict in Iran has sent a chill through British households, driving up the cost of petrol, energy and mortgages, and potentially hitting the jobs market too.
There is one potential piece of good news for savers, as the Bank of England may keep interest rates higher for longer to curb inflation, but it’s a rare bright spot.
Michael Davie, managing director of home improvement firm PureBuilt, said homeowners face a major hit, especially those whose fixed-rate mortgages are coming up for renewal. He said: “Some 1.8million are rolling off fixed-rate deals this year, many secured at rates close to 1% in 2021. Now they could face paying rates starting at around 5.65%.”
The Bank of England’s next base rate decision falls on April 30, with economists split on whether it will hold or raise rates further.
Stock markets plunged at the start of the hostilities but have since steadied, offering some relief for pension and Stocks and Shares ISA investors.
John Wyn-Evans, head of market analysis at Rathbones, said that as long as negotiations between the US and Iran show progress, markets should remain broadly calm, but warned: “Don’t chase short-term optimism around deadlines.”
Markets are likely to remain volatile, so investors should avoid panic selling and stay focused on the long term.
The conflict is already feeding into day-to-day finances, pushing up inflation and squeezing growth, said Rob Morgan, chief investment analyst at Charles Stanley. “Average pay growth has already eased to 3.6%, its weakest since the pandemic. It could even turn outright negative later this year.”
While unemployment fell unexpectedly from 5.2% to 4.9% in the three months to February, Morgan warned it may rise again, with vacancies now at a five-year low.
The UK is also heavily exposed to rising energy costs because it imports so much of its supply. “This acts like a tax as more expensive petrol and utility bills leave consumers with less spending money,” Morgan said.
Households had some relief at the start of April, as the Ofgem price cap fell by £117 to £1,641 in April.
However, it’s now forecast to jump by £288 in July to £1,929 due to the Iran war, and could exceed £2,000 from October.
Richard Neudegg, director of regulation at comparison site Uswitch.com, said: “For most households, the best way to cut their bills right now is to ditch the price cap and get a decent fixed-rate deal, protecting themselves from bill hikes ahead of winter.”
Savers may also need to act sooner rather than later. Kathleen Brooks, research director at XTB, said competitive deals are still available, but time may be running out. “If you have been sitting on cash hoping for a better deal, it is worth locking in a fixed-rate account now before the best offers disappear.”
It’s possible to get around 4.25% on easy access, rising to more than 4.5% a year on a five-year fixed straight bond.
While savings rates are higher, inflation is rising too, eating into returns. That makes it even more important to secure the best rate you can.