What falling inflation means for mortgages, savings and investments

Inflation fell to 2.3pc in April, according to the Office for National Statistics. The figure is a welcome fall from 3.2pc inflation seen in March, but still sits above the Government’s target of 2pc.

However, the drop will raise hopes that the Bank of England will reduce its Bank Rate over the summer, and with it the cost of borrowing. The Rate has sat at 5.25pc, a 16-year high, since August last year as the central bank has tried to tackle inflation.

Currently the market estimates there is a 40pc chance of the Bank Rate dropping in June, according to Fidelity International, and that it will fall again to reach 4.75pc by the end of the year.

This could have a significant impact on your finances – including savings, mortgages and investments. Here, Telegraph Money explains what your options are.

What is inflation?

Inflation is the term used by economists and governments to describe the speed at which prices are rising.

In Britain, we usually measure inflation by comparing the price of a particular item to its price at the same time the previous year.

For example, if a chocolate bar costs £1 in April 2023 and then in April 2024 it costs £1.04, its price has risen by 4pc and thus inflation for this particular item stands at 4pc.

However, statisticians have to calculate the pace of price rises across the whole of the economy and use a variety of methods to estimate this as accurately as possible.

The most closely followed of these methods used by the Government and the Bank of England (BoE) is the Consumer Price Index, often abbreviated to CPI, which is published each month by the Office for National Statistics (ONS).

This calculates inflation based on a typical basket of goods and services which statisticians at the ONS update every year.

What does falling inflation mean for your mortgage?

Mortgage rates have remained high over the past two years, adding financial pressure across the housing market.

For first time buyers, higher rates of borrowing have made it harder to get on the housing ladder, while existing homeowners face a mortgage shock when coming off ultra-low fixed rate deals and on to new loans at today’s rates.

The average two-year fixed rate mortgage is currently 5.93pc, according to analyst Moneyfacts.

Fixed rate and variable rate mortgages are linked to the Bank Rate, although not necessarily directly.

Some tracker mortgages are linked to the Rate, often sitting one or two percentage points above it, while fixed rate mortgages are priced based on swap rates – market expectations of where the Bank Rate will be at a certain point in the future.

While falling inflation and an expected drop in the Bank Rate is good news for mortgage holders, rates are unlikely to fall dramatically over the summer, leaving borrowers still facing much higher costs than two years ago.

Alice Haine, personal finance analyst at Evelyn Partners said: “Existing homeowners looking to refinance, such as those with a two-year fix taken out in 2022, might also be able secure a better deal than hoped, though those on longer-term products that started before BoE began its rate-hiking cycle in December 2021 will be less enthusiastic.

“They are still likely to face a jump in their repayments, unless they have managed to clear a large chunk of their home loan, as mortgage rates will still be significantly above the level they were when they took out their current deal.”

Nicholas Mendes of broker John Charcol added: “Today’s announcement indicates that markets will likely price in a prolonged hold, meaning mortgage rates will remain around their current levels for a bit longer.

“It’s important to stress that until an official bank rate cut occurs, any declines in fixed rates will be gradual and steady, rather than the rapid weekly decreases seen earlier this year, as swaps have remained settled based on initial market reactions.”

What can you do if you need to get a mortgage?

For homeowners coming to the end of their fixed rate mortgage it is important to remember you can start reviewing your options three to six months in advance and lock into a deal without committing to it. If rates then go up before you need to finalise your loan you are safe, but if rates fall in the interim you can choose a better rate.

“Assess your financial situation, check your credit score, and compare the current mortgage rate,” said Mendes.

“Consulting a mortgage broker can provide valuable guidance tailored to your specific need, such as whether to switch to a new fixed rate, opt for a variable rate or remortgage with a different lender.”

For those buying for the first time, now would be a good time to get everything ready for a mortgage application if rates fall in the summer, says Ben Thompson, deputy CEO at Mortgage Advice Bureau.

“Inflation in April being just 0.3pc above the 2pc target could be the spark to light the fire of the housing market. With inflationary pressures slowing closer to levels that the Bank of England are likely to be happy with, swap rates will fall further, and therefore those remortgaging or buying will see rates fall as a result.”

What does falling inflation mean for your savings?

Lower inflation brings both good and bad news for savers. With inflation at just 2.3pc it is very easy to beat it with the current rates on the market.

The average easy access savings rate is currently 3.12pc, according to Moneyfacts, but the most competitive accounts still pay over 5pc.

This is a positive, since inflationary price rises eat into the value of savings – put simply, if your savings aren’t matching or exceeding inflation, the rising prices mean your money won’t be able to buy as much as it previously could.

However, savings rates are unlikely to stay this high for long. Much like mortgages, savings rates tend to rise and fall with the Bank Rate – and providers may well take today’s inflation dip as a sign that the Bank Rate will soon follow suit, and reduce savings rates in anticipation.

Last year, while the Bank Rate was still rising, we saw savings rates peak at a little over 6pc. Despite being frozen since August, rates have been steadily falling since then in anticipation of when it starts to fall.

What can you do about it?

Today’s inflation fall is likely to put further downward pressure on savings rates – so, as a minimum, you should check your current rates and make sure you’re beating the inflation rate.

Planning ahead, it might be a good time to commit to a fixed-term account if there’s cash you won’t need to access for at least a year.

“There is still an opportunity to benefit from higher savings rates,” said Adam Thrower, head of savings at Shawbrook.

“While there are still one-year bonds and easy-access accounts offering slightly higher headline rates today, the benefits of locking into longer-term accounts is the guaranteed returns over an extended period of time, potentially allowing for inflation-busting returns for years.”

What’s the best deal on the market?

For easy access accounts, Monument Bank is offering 5.01pc, but requires a minimum deposit of £25,000. Close Brothers Savings pays 5pc, and requires you to pay in at least £10,000 to open the account. As these are both variable-rate accounts, the rate could change at any time.

For a fixed account, Habib Bank Zurich pays 5.21pc for a one-year bond.

Longer-term bond rates, which usually pay more, currently have lower rates – but could still be worth considering if rates start to fall more widely later this year. You can get 4.57pc from Shawbrook Bank for a five-year fix.

What does it mean for your pensions and investments?

The stock market is not officially linked to inflation or the Bank Rate, but as both are significant indicators of the state of the economy, they can have a big impact on investor sentiment.

Jason Hollands, managing director of Bestinvest by Evelyn Partners, said this morning’s inflation rate drop could be good news for investors. “The combination of easing inflation, the prospect of lower borrowing costs and an improving UK growth outlook should also prove supportive for UK equities, especially the more domestically focused small and medium sized names, which have been deeply unloved in recent times,” he said.

“This could be a good entry point for investors, as UK equity valuations remain very cheap compared to global equities, a point evidently not lost on the wave of bids for British companies by foreign acquirers and private equity funds we have seen recently.

“The UK stock market has certainly been confronted with many challenges including a dearth of IPOs and companies being lured to overseas exchanges, but better economic news, high levels of share buybacks and a wave of bids are creating lots of opportunities for investors.”