High interest rates ‘gave savers a £16bn boost’

Households have received a £16 billion boost from higher interest rates, helped by “forced” saving during the coronavirus pandemic and trends in the mortgage market, a think-tank has calculated.

But the boost has not been felt evenly by households across the UK and it could also be significantly unwound this year, presenting a fresh living standards challenge, the Resolution Foundation said.

The foundation examined the impact of the Bank of England’s rate-raising cycle between december 2021 and August 2023, when interest rates increased from 0.1 per cent to 5.25 per cent, on household balance sheets and incomes.

It said that some other rate raising cycle sin recent decades have tended to push up households’ debt repayments by more than any extra income from savings. But the opposite has happened over the latest cycle, delivering an“income boom” of about £16 billion.

Changing mortgage preferences have played a key role, it said. Many households are sitting on fixed-rate mortgage deals, which has slowed the pass-through of rate rises to the mortgage costs paid by homeowners.

The income boost from higher savings interest has been more immediate, with real income from savings rising by £34bn – more than offsetting the £18bn rise in debt interest costs to give a net interest income boom of £16bn, the foundation said.

But it has not been felt evenly across households though, with older households the biggest beneficiaries, as the average household headed by someone aged 65 to 74 has around three times the interest-bearing savings as a household headed by someone aged 35 to 44 (£57,000 versus £20,000).

Households in the older age group also have £14,000 in outstanding debt typically, compared with £98,000 on average in the younger age group.