The recent turmoil in the bond market has reignited concerns about escalating borrowing costs, echoing the financial disruption that ensued following Liz Truss's ill-fated mini-budget in 2022. Despite these fears, experts are advising against panic, asserting that the situation remains manageable. As the new year approaches, fresh lending targets are set to be implemented, which could provide some relief for the beleaguered mortgage market. Although only a handful of niche lenders have raised mortgage rates thus far, the broader economic implications continue to unfold. Meanwhile, savers and investors must navigate a complex landscape as interest rates and inflation dynamics evolve.
The mortgage market has faced significant challenges in recent years, compounded by the uncertainty stemming from bond market fluctuations. Specialist and niche lenders, according to Simon Gammon, “tend to be funded in a way that means they are more exposed to bond market volatility.” This exposure has led to some lenders increasing their rates, although the majority have yet to follow suit. The upcoming implementation of new lending targets could offer some respite, with Gammon noting that “the new year brings fresh lending targets, and they’ve had a difficult few years in the mortgage market.”
Investors under 50, particularly those saving into pensions, are likely less affected by bond market volatility. Their investments predominantly lie in stock market-based assets rather than bonds. A temporary decline in the FTSE presents an opportunity for these investors, as they can acquire more shares for their money. For individuals nearing retirement or currently accessing their pensions through drawdown schemes, the current spike in gilt yields may prove beneficial. As Simon Gammon remarked, “For people in retirement who are currently accessing their pension via drawdown, this spike in gilt yields could be a good thing.”
However, Hal Cook cautions that individuals approaching retirement might experience concern over their pension plans amid this volatility. "This could cause concern for those approaching retirement who have plans for their pension pot at the point of their retirement, or are worried about the value of their tax-free cash," Cook explained. Despite these apprehensions, the overarching consensus among financial experts is that no immediate panic is warranted.
The Bank of England is anticipated to cut the base rate next month, provided inflation trends remain favorable. Should inflation rise over the coming months, interest rates are expected to decrease gradually, which could benefit savers. Experts forecast two interest rate cuts within the year, which would be advantageous for individuals with savings accounts. Furthermore, current offers suggest savers might secure better rates on one-year fixed-rate accounts compared to those with longer lock-in periods.