The current news cycle feels a bit like we’ve hit rewind back to the 1980s and the world of the Pet Shop Boys, SuperTed, Kylie and Jason, and Rubik’s cubes.
However, when we take off our rosy nostalgia-tinted glasses, we also remember it was a time of tense global affairs, an energy crisis, rising inflation and an economic recession. Sounds awfully familiar, doesn’t it?
Inflation figures have been consistently on the rise since a rate of 3% was reported in September 2021, reaching 10.1% as reported by the Office for National Statistics (ONS) for the year to July 2022, before coming down slightly to 9.9% since.
In a bid to halt soaring inflation, the Bank of England’s (BoE) Monetary Policy Committee has increased the base rate six times since December 2021 with the rate, as of 6 September 2022, sitting at 2.25%.
Consequently, lenders are increasing their respective interest rates in response.
But what does that mean for you and your client’s financial plans? Read on to discover three important ways rising interest rates will affect you and your clients.
1. Rising interest rates have made saving the talk of the town
It is never fun having to tighten your belt and slash your spending. It is usually the luxuries of life that are first to face the axe. But what if there was an alternative approach?
Firstly, it is important to understand why interest rates are on the rise.
Higher interest rates are designed to encourage saving rather than spending, with the aim of reducing inflation. However, reduced demand can also negatively affect stock market valuations.
Despite rising six times already in 2022, the BoE base rate is likely to continue to rise. The Guardian reports that it is expected to breach 3% by the end of 2023, which will likely lead to lenders increasing their rates further.
If rates continue to rise rapidly, then consumer demand may decline, which will have a domino effect on spending, possibly leading to reduced sales and profits.
Suddenly, looking for the latest “deal” has become all the more desirable. There is something quite delightful about shaving off £20 here and there, whether by reducing your insurance costs or getting a better internet package. It can feel like beating the system or grabbing, as the French say, un morceau de gateau.
But what if we told you that you could save that money elsewhere? We recently saved one of our clients £20 on his pension and investment fees.
That might initially not sound that impressive. But that £20 was for every day of the week, or £7,700 a year.
So, he now found himself with a choice. He could either carry on saving £1,000 a month, or he could reduce his contributions to just £1,000 a year and still get the same result.
That £7,700 of savings is firmly in his back pocket. If he wanted to, he could put it towards his energy bill and still have cash to spare. Suddenly, those previously cut luxuries might be back on the table.
2. Protect your surplus savings by taking a page out of Warren Buffet’s playbook
The main reason for rising interest rates in the UK is to combat soaring inflation, and this has a knock-on effect on your savings.
With inflation currently sitting at 9.9%, according to the ONS, allowing cash to sit in savings, even with interest rates rising, will likely lead to their real value eroding over time.
As of 21 October 2022, financial analysts Moneyfacts report a best interest rate of 2.8% on an easy access savings account.
What this means is that, if your clients had invested £10,000 a year ago at a 2.8% interest rate, they would have £10,280 now. However, goods and services that cost £10,000 a year ago now cost an average of £10,990. So, as you can see, the real value of savings has fallen.
If clients have large amounts of surplus cash in savings accounts, it could be worth encouraging them to seek out professional advice regarding alternative ways to invest their money.
If you haven’t heard of “Wozzer”, aka Warren Buffett, he’s probably the most successful and influential investor on the planet.
So, what does his investing playbook have in common with our approach at Grey Parrot?
In simple terms: evidence-based, low-cost investing. It’s our belief that you should invest your money where the evidence says you have the highest probability of success, which is how Mr. Buffett approaches investing too.
So, if you want to know how our approach can help you protect the value of your savings while generating the growth needed to meet your long-term financial goals, then get in touch.
3. The cost of personal and professional borrowing is on the rise
Credit options can be a godsend in tough times, but as interest rates rise, so does the cost of borrowing.
This will be a worry for all kinds of businesses including brokerage firms. SP Global reports how high costs of borrowing can have “a dampening effect on insurance broker deal-making in the UK” with many firms relying on debt financing to facilitate business.
Mortgages will be of particular concern for both individuals and businesses, especially if you or your clients are on a variable- or tracker-rate mortgage.
According to Yahoo Finance UK, borrowers in the UK have £267 billion of variable-rate mortgage agreements – it means nearly 1 in 6 individuals are exposed to the risk presented by rising interest rates.
Borrowers may also feel the pinch in terms of any business growth plans that are linked to debt financing.
All in all, saving is on the agenda, which makes it even more priceless to seek out alternative approaches that might let you and your clients reach your saving goals while keeping as much cash in your wallets as possible.
A conversation with Grey Parrot could be the best next step.
Get in touch
Financial plans are designed to protect your client’s best interests and keep them on a path towards their established savings and lifestyle goals.
If they are worried about how current events might be affecting their businesses and goals, referring them to a financial planner can help them alleviate any concerns, avoid any knee-jerk decisions, and make the right decisions to ensure their financial security.
If you have clients who would benefit from advice, or you are interested in finding out how you can work more closely with us, please contact us by email at mail@grey-parrot.co.uk or call us at 02039 871782.
Please note
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.
Buy-to-let (pure) and commercial mortgages are not regulated by the FCA.
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