Interest rates: Why there is more pain still to come

A run of 14 consecutive interest rate rises has brought worry and financial pain for mortgage holders - but it has also boosted savers' bank balances.

Millions of people in the UK are both borrowers and savers (while some are one, or neither), so the balance - or imbalance - between the two is important for our money.

Documents published after the chancellor's Autumn Statement on Wednesday give a fascinating insight as to which way the scales are shifting.

This year, according to the UK's official economic watchdog the Office for Budget Responsibility (OBR), the benefit of better returns on savings has outstripped the hit of higher mortgage rates. Our real household disposable income - put simply, the money we have to spend or save - has risen slightly in 2023.

The trouble is, that is bookmarked by a fall in this disposable income in 2022 and another forecast drop in 2024.

Last year, everyone took a hit from rapidly rising prices. Next year, an estimated 1.6 million homeowners will see their current mortgage deal expire and so will move on to a much more expensive loan.

In short, there is more pain to come.

The OBR's view is a forecast, and it may ultimately prove to be wrong, but the OBR is the official body that marks the Treasury's homework and its predictions carry significant weight.

Much was said in recent days about tax cuts, pension rises, and even speculation about the date of a general election. However, interest rates have a central impact on our finances, and the power to set them lies with the Bank of England, not the chancellor.

After more than a decade of very low rates, they rose consistently from December 2021. That is two years now, yet, what the OBR's outlook document tells us is how relatively resilient our collective finances have been to those increases this year.

"Rising interest rates support household incomes (on aggregate) due to the boost to savings income from higher deposit rates so far outweighing the rise in interest payments from higher mortgage rates," it says.

In real life, this effect is not shared equally. Many millions of people have less than £100 in savings. A whopping £260bn sits in bank accounts that do not pay any interest. There is a whole separate debate about rates of tax on savings income.

Even if you are not a homeowner, then higher mortgage rates are likely to have an impact - as it has been a major factor behind rapidly rising rents.

The OBR's figures are an aggregate, creating a risk of drawing oversimplified conclusions, but what it says next is quite clear.

It points to a rise in debt interest payments next year, as more fixed-rate mortgages face renewal. As a result, real household disposable income is set to fall.

In other words, things will get tougher - even if the Bank of England decides that it will not raise rates any further than their current level of 5.25%.

There is, however, some good news for those facing a mortgage shock next year, owing to more competition in the mortgage sector. Providers have money available to lend so have been cutting their mortgage rates.

While many people face big repayment hikes, they will not be "quite as drastic" as they have been recently, according to Aaron Strutt from broker Trinity Financial.

"The banks and building societies have been very busy lowering their rates and there has been a considerable shift in pricing. After offering high rates for such a long period, there are now two-year fixes starting at 4.78% and five-year fixes starting at 4.43%," he says.

"If you have selected a new mortgage rate with your existing lender or a new lender, it is well worth checking to see if the rate has come down. Most lenders allow borrowers to switch to the cheaper deals they offer a few weeks before the mortgage starts."

There is, as we know, another side to that coin. While mortgage rates might be on the way down again, analysts say savings rates may also have peaked - including at Treasury-owned National Savings and Investments (NS&I),

"Savers should brace themselves for rate cuts on NS&I accounts and for the Premium Bond prize fund to fall, as the government-backed provider has already exceeded its fundraising target for the tax year," says Laura Suter, head of personal finance at investment platform AJ Bell.

MPs on the influential Treasury Committee have accused big banks of doing "as little as they can get away with" when setting savings rates for loyal customers. They advise people to continue to shop around for the best returns.

So a busy week of economic announcements now leads us into a busy, festive, season for our finances.

Chancellor Jeremy Hunt spoke of cutting National Insurance in January, raising the state pension by 8.5% and benefits by 6.7%, as well as a big boost to minimum wages, in April.

He said these would help people to pay the bills and showed how things were moving in the right direction.

"Average disposable income is around £800 higher than the OBR expected this spring, and the Autumn Statement set out a clear plan to reduce our borrowing and debt to keep inflation falling, helping get mortgage rates back down to affordable levels," said a spokesman for the Treasury.

However, even if prices are not going up at the rate they once were, the financial pain felt by millions of people is far from over yet.

There is a guide to different savings accounts, and what to think about on the government-backed, independent MoneyHelper website.