Inflation is up, rates are up and giant banks are reeling: How to protect your savings, sort your mortgage AND try to grow your wealth in the financial storm

It has been a stormy week for personal finances. Financial markets were rocked by banking collapses in the US and fears that the contagion could spread. Then the Bank of England hiked interest rates again on Thursday to a 14-year high.

And inflation – which looked like it was starting to subside – inched up again and remains firmly in double digits. 

This economic turbulence has a tangible impact on all of us – on everything from the value of our savings and the size of our household bills to the retirement lifestyle we can afford.

Here we break down what it means for you and your money – and looks at what could be waiting over the horizon. 

For savers turmoil can prove a silver lining…

In a week of unsettling news, savers enjoyed a well-earned silver lining.

They should be one of the greatest direct beneficiaries of the Bank of England’s latest rate rise. 

The base rate was increased from 4 to 4.25 per cent, marking the 11th consecutive rate hike since the Bank of England started raising rates in December 2021.

In theory, savings rates should increase in line with the base rate. That is because savings providers use it as a rough benchmark from which to set their own rates. However, many providers are proving sluggish in passing on rises.

Some, including Coventry and Yorkshire Building Societies, Chase Bank and Atom Bank, increased savings rates within minutes of the Bank of England announcement. Read more here on how those rates stack up: Four savings providers up easy-access rates after Bank of England hike.

Others, such as Barclays and Lloyds, told Wealth & Personal Finance they are still reviewing their rates in light of it.

Rachel Springall, finance expert at rates scrutineer Moneyfacts, says: ‘Not every savings provider will pass on the base rate rise, so it’s crucial for savers to ditch and switch if they find a better return elsewhere.’

In general, challenger banks and building societies offer much higher rates on easy access accounts than most of the high street banks. The best rate on an easy access account is currently 3.4 per cent, offered by savings provider Chip. You can check the best easy access savings rates in our tables.

If you don’t need your money for a while, you could opt for a fixed-rate account that offers a more generous rate. Al Rayan Bank offers 4.5 per cent if you fix for 12 months; Tandem has 4.6 per cent if you fix for five years. You can check the best fixed rate savings in our tables.

Savers looking to build up a tax-free nest egg will want to consider an Individual Savings Account (Isa). Rates on these are broadly similar to traditional savings accounts – the key difference is that you can save up to £20,000 a year without paying tax on interest earned. You can check the best cash Isa rates in our tables.

The good news on rates last week was tempered by the surprise revelation that inflation is still rising – now at 10.4 per cent. That means that if you had £100 in cash a year ago, it would have the purchasing power of £89.60 today.

Using high-paying savings accounts can help counter the impact of inflation, but even if you opt for the most competitive, the value of your savings will still be falling in real terms. The Bank of England forecasts that inflation should fall sharply towards the end of the year. 

Borrowers face a rise in mortgage costs

Around 1.6 million homeowners who have tracker or variable rate mortgages will have already seen their payments rise as a result of the rate rise. 

For someone with an outstanding mortgage of £250,000, the rate rise will amount to an extra £35 a month, according to figures from wealth platform AJ Bell. A borrower with a £400,000 mortgage would pay another £56 a month – or £672 a year.

Most borrowers are on fixed-rate mortgages, so will not see an impact on their monthly payments until they come to remortgage.

But around 400,000 people are on fixed deals that are due to expire in the next three months and could be in for a shock. 

The average two-year fixed rate mortgage is now 5.32 per cent, according to Moneyfacts. This is more than double what it was two years ago, when they averaged at 2.57 per cent. However, rates are slightly down on the 5.44 per cent seen just a month ago.

The worst of the pain may be over for borrowers, although they are unlikely to enjoy rock-bottom rates again any time soon. 

The Bank of England is not expected to implement many more rate rises in the near future as inflation is forecast to start falling considerably this year. 

Lenders may not even necessarily increase rates as a result of last week’s base rate rise as many had seen it coming and priced it into their loans already. Nationwide even cut its mortgage rates following the Bank of England announcement. 

One group of homeowners really need to watch out, however. Those who are about to come off a fixed-rate deal should line up a new one as soon as possible.

That is because when you move from a fixed-rate deal, your lender sticks you on its standard variable rate. These have hit more than 7 per cent, which means that someone coming off a two-year fixed now could see their rate leap from 2.57 per cent to 7.12 per cent.

For someone with a £400,000 mortgage, this is an increase of more than £1,000 a month.

You can prepare a new mortgage as early as six months before your current one expires. Planning in advance should insure a seamless transition. 

Myron Jobson, senior personal finance analyst at investment platform Interactive Investor, says: ‘You are not tied to mortgage contracts until you sign on the dotted line, so you can ditch it if you find a better deal in the interim.’ 

Household bills are still going up

Most economic forecasters had wrongly predicted that inflation would continue to fall in February. But anyone who has walked through the supermarket aisles or down the high street lately would unlikely be surprised that inflation rose again.

Cash-strapped households are still seeing the cost of almost all goods and services soar, and yet few are seeing pay rises to match it.

While inflation rose by 10.4 per cent overall, dig into the detail and you’ll find huge variation. For example, the cost of milk, cheese and eggs rose by 30.8 per cent; oils and fats by 32.1 per cent; flights by 16.8 per cent; and pet products by 14.6 per cent.

Meanwhile sports equipment and second-hand cars fell in price. That means that depending on how you spend, you may be experiencing a considerably higher – or lower – personal inflation rate than the average.

Insurance is one area in particular that has seen large price rises, last week’s inflation figures confirmed. 

Car insurance in particular, rose by 33.2 per cent, while house contents and health insurance rose by 6.4 and 6.2 per cent respectively.

Insurers argue that premiums have risen primarily because of the rising cost of materials and labour. 

For example, if your house was damaged and needed repairing, the cost of the timber, bricks, fittings and labour is considerably higher today than a year ago. Similarly, if your car was written off, it would cost more this year than last to replace it.

So what next? The Bank of England predicts that inflation will fall significantly in the second half of this year. It believes the extension to the energy price cap, announced by Chancellor Jeremy Hunt in the Spring Budget, should help.

This puts a cap on the average energy bill of £2,500 for the next three months. Without the extension, bills would have risen to £3,280 on average. Falling petrol prices should also help ease the pressure.

However, prices are not predicted to fall – they are just expected to stop increasing quite as quickly.

Inflation hits retirees… but annuities are up

Rising inflation can be particularly harmful to retirees. That is because while people in work can increase their earnings by negotiating a pay rise, increasing their hours or changing jobs, people in retirement tend to live on a fixed income.

Data released by the Department for Work and Pensions last week revealed that pensioner incomes fell in real terms last year, from £376 to £349 a week.

With the state pension set to rise on April 6, by 10.1 per cent, this should offer some relief from soaring inflation.

Those who qualify for the full new state pension will receive £203.85 a week, up from £185.15. Those who reached state pension age before April 2016 and are therefore on the old basic state pension will receive £156.20, up from £141.85.

Last week’s interest rate rise is likely to prove good news for those about to retire and looking to buy an annuity.

An annuity is a product that allows you to take your retirement nest egg and turn it into an income for life.

If you have a £100,000 nest egg, you can buy an annuity income of £5,888 for life, according to analysis by William Burrows, a financial adviser who runs the Annuity Project. This could increase to £6,000 if rates rise again.

A year ago, the same annuity would have paid around £1,500 a year less. Burrows believes that this means it could be a good time to consider an annuity. The figures are for a couple aged 65 and 60, buying an annuity that does not increase with inflation.

Invest for long term and hold your nerve

With so much dramatic financial news, it can be hard for investors to know what to do.

Putting your fingers in your ears and just carrying on can feel counterintuitive. But investors need to remember that they are investing for the long term and not worry too much about short-term volatility.

Make sure you have a balanced portfolio that is not overly dependent on the fortunes of any one company, sector or region.

And check that you are keeping costs in check by making sure you are getting good value from your investment platform or pension provider. Then just drown out the noise.

If you are worried about investing at a time of such market turbulence, invest a little often rather than as a lump sum. That way, you don’t risk investing all of your money just before a market fall.

Becky O’Connor, director of public affairs at pension provider PensionBee, says: ‘It is important to focus on controlling what you can control, which includes increasing contributions if you can and making sure your money is invested correctly for your financial goals, whether that is long-term growth or taking an income.’