Month: April 2023

High mortgage rates continuing to put pressure on young homeowners…

While the sense of turmoil that defined Liz Truss’s brief premiership has thankfully subsided, the legacy of the measures she (tried to) implement still remains.

According to the Bank of England, the number of mortgage approvals hit its lowest level since 2009 – excluding Covid lockdowns – during January this year.

That means that the mortgage market has contracted for five months in succession, and many analysts believe this is a consequence of the ill-fated Mini Budget last September, which sent mortgage rates shooting up and products pulled off the market.

At the same time, we’ve seen annual house price growth slipping into negative territory for the first time since June 2020. According to Nationwide Building Society data, prices in February 2023 were down 1.1 per cent on the same month last year – the biggest dip since 2012.

As Robert Gardner, Chief Economist at Nationwide, notes: “While financial market conditions normalised some time ago, housing market activity has remained subdued.”

This, he believes, reflects the “lingering impact on confidence”, as well as continued high inflation and mortgage rates being well up on where they were in 2021.

Higher mortgage rates are having a particularly big impact on young homeowners. New figures from the Financial Conduct Authority (FCA) show that borrowers aged between 18 and 34 are more likely to be financially stretched than other working age adults.

The FCA also reports that 356,000 mortgage borrowers could face payment difficulties by the end of June next year. This includes those who are reaching the end of their fixed rate deal, who estimates suggest could end up paying a monthly average of £340 extra on their mortgage.

As the watchdog notes, being stretched doesn’t necessarily mean borrowers will miss payments, as some will be able to rely on savings, cut spending elsewhere or increase their incomes to cover their mortgage costs.

But while this might help homeowners meet their immediate mortgage commitments, that doesn’t help with their longer-term financial planning, particularly if they are actively working to achieve specific goals.

So if you’re among those who are struggling with mortgage costs right now, or are facing a big hike in the size of your repayments, it’s well worth asking for advice. You could speak to your lender, for instance, or consult free services such as MoneyHelper.

Speaking to a professional, regulated financial adviser can also be a good idea, as they’ll take a holistic look at your finances before offering guidance and support. With this approach, any advice will be given with your long-term financial and lifestyle goals firmly in mind, as you don’t want to be knocked off course as you’re working towards a specific aim.

Making big financial decisions and juggling conflicting interests can be really difficult, as you’re managing strong emotions while trying to make sense of technical jargon and details.

A professional financial planner will take an objective look at your situation, so you can have the peace of mind you need and confidence that you’re making the right decisions at the right time.

Please don’t hesitate to get in touch with us if you have any questions about managing your finances in the current climate. We’ll be happy to speak with you.

When is the state pension age going to rise?

Plans by the French government to raise the retirement age by two years to 64 prompted widespread outrage, with protesters taking to the streets of Paris to make their objections heard.

The situation became so serious that police ended up firing tear gas at protesters, King Charles had to cancel his planned state visit to France, and you could have been forgiven for thinking that photos of the protests were actually images of a war zone.

Of course, observers in this country might be wondering what all the fuss is about. After all, the state pension age in the UK is currently 66 and the government is understood to be planning to increase it to 68, so some might argue that the French don’t know how good they have it.

But pensions and politics can be a toxic mix, so could recent events in Paris serve as a warning to politicians on this side of the Channel – not necessarily about civil disobedience necessarily, but about the strength of feeling that comes with making people wait?

The state pension age is due to go up from 66 to 67 by 2028 and then up to 68 from 2044.

Ministers were expected to announce in May that the changes would come much sooner – with a rise in the state pension age to 68 between 2037 and 2039. But the government now plans to wait until after the next general election before making this announcement.

Government insiders told the Financial Times that this is ostensibly because ministers want more time to review falling life expectancy figures, as lengthening life spans had previously been cited as a reason to justify increasing the state pension age.

Work and Pensions Secretary Mel Stride, meanwhile, believes a further review into the issue is needed because previous studies weren’t able to take into account “significant external challenges”, such as Russia’s invasion of Ukraine and the Coronavirus Pandemic.

However, another government source revealed: “They were gung-ho to raise the pension age, but they got cold feet.”

Announcing an increase in the state pension age could potentially alienate middle-aged voters, not necessarily to the point where they take to the streets, but at least enough to make them consider switching their vote.

Not wanting people to do that in the run-up to an election makes political sense, but delaying this announcement still piles uncertainty on people who really know what the deal is when it comes to their retirement.

As Paul Johnson, Director of the Institute for Fiscal Studies, observed: “Things do change – in this case projections of life expectancy – and it’s good to remain flexible in the face of change. On the other hand, this choice will affect those already in their fifties who need to be able to plan for retirement with some degree of confidence.

“Knowing when the roughly £10,000 a year state pension will kick in matters. As for the government, and hence the taxpayer, delaying the rise in pension age will cost north of £60 billion.”

Of course, any good financial adviser will tell you that you can’t rely on the state pension to fund your retirement, as it won’t be enough to cover all your living costs and give you the lifestyle you want and deserve. But it could still be a valuable top-up to your retirement income, so it’s important to know well in advance when you may be eligible to receive it, so you can factor it into your retirement plans.

This whole debate is an important reminder of why it’s so important to take matters into your own hands when it comes to planning for the future, at least as much as you possibly can. It’s in the government’s gift to decide when you can receive the state pension, so if you’re relying heavily on that income, deciding when you can retire is ultimately beyond your control.

By contrast, if you’ve made your own pension provision, you could be in a much stronger position to choose when you retire and take charge of your own destiny.

If you have any questions about planning for your retirement, please get in touch with us and we’ll be happy to speak with you.

Will interest rates ever start to fall?

Interest rates have been heading in one direction for more than a year now, rising from 0.1 per cent in December 2021 to 4.25 per cent today.

That’s had a very real and tangible impact on households in the form of higher mortgage repayments, and also pushed up the cost of borrowing for businesses too.

And as high inflation continues to bite, stretched businesses are being forced to pass on many of their costs to hard-pressed consumers.

Of course, the UK is by no means alone, as high inflation is affecting major economies all over the world, and forcing central banks to act accordingly.

For example, the US Federal Reserve recently raised interest rates by a quarter of a percentage point, taking rates from 4.75 per cent to five per cent. These are the highest rates seen in the US for more than 15 years.

So will the bubble burst or will the cost of borrowing continue to soar?

Well, a new forecast by the International Monetary Fund (IMF) says interest rates in major economies will fall to where they were before the pandemic, due to factors such as ageing populations and low productivity.

Furthermore, it believes recent increases in interest rates are “likely to be temporary”, as the rate of price increases will start to ease.

“When inflation is brought back under control, advanced economies’ central banks are likely to ease monetary policy and bring real interest rates back towards pre-pandemic levels,” the IMF said.

However, the IMF was non-committal on a number of points. For instance, it commented that how close to pre-pandemic levels interest rates will fall depends on “whether alternative scenarios, involving persistently higher government debt and deficits, or financial fragmentation, materialise.”

Significantly, it didn’t state precisely when it expects interest rates to come down – a useful piece of information for countless people, not least those who are due to renew their mortgages in the coming months.

The Bank of England Governor, Andrew Bailey, has been more precise, saying recently that he is “pretty confident” inflation will “fall sharply” from summer onwards.

Whether the IMF is right to play its cards close to its chest rather than make themselves hostages to fortune, as Mr Bailey may have done, remains to be seen, but one thing is certain:

We will be here to keep a close eye on the wider economic situation, monetary policy decisions, and what all this means for you and your finances.

If you have any questions about navigating these unpredictable waters and how you can make sure your money continues to work hard for you, please don’t hesitate to get in touch.