In an ever-fluctuating financial landscape, understanding and capitalising on interest rate trends is key to maximising your client’s financial returns.
The UK, like many other global economies, is currently experiencing a period of unusually high interest rates. This situation presents both challenges and opportunities for savers and investors.
In this article, Andrew Waring director of intermediary at Stubben Edge Group & Akoni, explores the current state of high interest rates in the UK, predictions for future rate changes, and the strategic benefits of locking into higher rates now through fixed-rate financial products.
The current state of high interest rates
The recent hike in interest rates in the UK has been influenced by a combination of factors, including economic recovery post-pandemic, inflationary pressures, and political tension. As a result, The Bank of England has been adjusting its base rate as a tool to control inflation and stabilise the economy. The base rate currently stands at 5.25% (Bank of England, November 2023.)
However, this increase in the base rate has had a ripple effect across SWAP rates as well as various financial products, including savings accounts, mortgages and loans.
For savers, this environment presents an opportunity to earn higher returns on deposits, as banks and financial institutions are offering better interest rates on savings accounts and fixed-term deposits than have been seen in recent years.
This extends particularly to fixed-rate accounts. Interest rates are predicted to start decreasing in 2024, so by bagging a fixed rate now, your clients could reap the rewards of these high rates long after they stabilise.
Predictions for interest rate changes
Looking ahead, the trajectory of interest rates is subject to numerous influences, including economic growth, employment rates, and global economic conditions. Most financial analysts predict that the Bank of England will continue to increase rates in the short term to combat inflationary pressures. However, these rates are not expected to rise indefinitely.
There is a general consensus that once inflation is brought under control and economic growth stabilises, interest rates will plateau and eventually decrease. The timeline for these changes, however, remains uncertain but current predictions expect the decline will begin in mid-2024.
The impact of unstable SWAP rates
In recent times, the instability of SWAP rates has caused mortgage interest rates to increase considerably, meaning fixed-term mortgages haven’t been so appealing.
Now, SWAP rates have started to decline, meaning fixed-term mortgage rates are looking increasingly attractive to home buyers.
The case for locking into higher rates now
Given the current high-interest-rate environment and the uncertainty about future rate changes, there is a compelling argument for locking into higher rates now, especially for those looking for security and predictability in their returns.
Fixed-rate financial products, such as fixed-rate bonds or fixed-rate savings accounts, allow your clients to secure a high interest rate for a set period.
Here are some reasons why locking into a fixed rate account now could benefit your clients long term:
• Security and predictability: Fixed-rate products offer security against future interest rate drops. By locking in a rate now, your clients are guaranteed a fixed return for the duration of the term, regardless of market fluctuations.
• Planning and budgeting: Fixed-rate returns facilitate better financial planning and budgeting. Knowing exactly how much interest your clients will earn over a set period makes it easier to plan for future expenses and investments.
• Higher interest earnings: With current rates being comparatively high, locking into a fixed rate now could mean securing a higher return than what might be available in the near future, as rates stabilise or decrease.
• Diversification: For those with a diversified investment portfolio, fixed-rate products can add a stable, low-risk component, balancing out higher-risk investments.
Choosing the right fixed-rate product
If you’re working with a client who’s considering a fixed-rate product, it’s important to ensure the one chosen aligns with their financial goals and circumstances, as not all products are the same.
You might want to consider the following:
• Term length: Fixed-rate products typically range from one to five years. Longer terms often offer higher rates but require your clients to lock away their money for a longer period.
• Interest payments: Some products offer monthly interest payments, which can be beneficial if your clients rely on their savings for income. Others compound interest annually or at the end of the term, which can be more suitable for long-term savings goals.
• Minimum investment: Be aware of the minimum deposit requirements, which can vary significantly between products and institutions.
• Access to funds: Most fixed-rate products do not allow access to funds during the term without incurring a penalty. Ensure that your client can commit the funds for the entire term.
• FSCS protection: Ensure that your client’s savings are protected under the Financial Services Compensation Scheme (FSCS), which protects deposits up to £85,000 per financial institution.
The bottom line
The current high-interest-rate environment in the UK offers a unique opportunity for savers and investors. Locking into higher rates now through fixed-rate products can provide financial security, predictability and potentially higher returns.
However, it’s crucial to carefully consider your client’s personal financial situation and objectives when choosing the right product. As with any financial decision, staying informed and consulting with financial advisors can help you make the most of these high-interest-rate opportunities for your clients.
This article was written for PA Adviser by Andrew Waring director of intermediary at Stubben Edge Group and Akonia.