Households’ £19bn windfall from rate rises

Higher interest rates have lifted incomes for savers who have paid off their mortgage, says think tank

‘Interest rates will move from boosting income growth to undermining it in 2024’

HIGH interest rates have boosted household incomes by £19bn as “baby boomers” earn more on their savings, analysis has found.

Households have earned an extra £35bn from savings interest since the

Bank of England started to raise rates at the end of 2021, more than double the £16bn increase in their debt interest bills, according to the Resolution Foundation, a think tank.

This means they have made a net gain of £19bn. Torsten Bell, the foundation’s chief executive, said this was “unprecedented in the recent history of UK rate-rising cycles”.

Since December 2021 the Bank has raised interest rates from a record low of 0.1pc to a 15-year high of 5.25pc.

Normally, rate rises squeeze household incomes because they drive up the cost of borrowing. But this time the Bank’s rate increases have brought the biggest boost to disposable household incomes in any cycle of rate increases since at least 1988.

Mr Bell said this was because households now had less debt than they used to. But it is baby boomers, those born from 1946 to 1964, who are reaping the benefits as older households are far more likely to have larger savings and no mortgage debt.

Separate research from the foundation in November found that between 2018 and 2020 households headed by someone aged 65 to 74 had more than five times more cash in savings accounts than those aged 25 to 34. Older people are also much more likely to own their home mortgage-free.

Around two thirds of England’s outright homeowners are aged 65 or over, according to the English Housing Survey.

People aged 35 to 54, by contrast, hold most of the nation’s mortgages. Of the households that have high debt levels, far more are now protected by fixedrate mortgages.

This means that higher incomes for savers have arrived more quickly than higher costs for mortgage borrowers, Mr Bell said.

But this will change in 2024, he warned. “Interest rates will move from boosting income growth to undermining it in 2024,” he said.

This is because 1.5m households will come to the end of a fixed-rate mortgage and will have to refinance at much higher rates. On average, these households will see their annual mortgage bill rise by £1,800. This is despite the fact that larger than expected falls in inflation mean that markets now expect earlier interest rate cuts from the Bank.

While rate cuts will improve the picture for mortgage holders, they will still face higher costs, Mr Bell said, although people who own their home mortgage-free will be protected from this.

On average, those who own their home outright will see their disposable income rise 2pc next year.