The author of this article, at Standard Chartered Private Bank, takes a dive into the world of interest rates, savings rates, and some strategies that HNW clients may want to consider.

With governments’ monetary policy and inflation rates being big talking points for wealth manages, we carry the following analysis from Robert Morrall, head of lending solutions, Standard Chartered Private Bank. The editors are pleased to share these insights. The usual editorial disclaimers apply. To comment and jump into the conversation, email tom.burroughes@wealthbriefing.com

While some of us vividly remember the UK Base Rate hikes of the late 1980s, when mortgage interest rates rose to in excess of a dizzying 15 per cent, it’s fair to say that for many, all they remember is the longest run of low interest rates, which has felt nothing short of normal.  The reality, however, is that this has been an unusually long and low interest rate environment, as the following graph makes clear:

 
Source: UK Base Rate, Bank of England

It can be seen from this graph, that the highest UK Base Rate was at 17 per cent in the late 1970s. This was due to rising wages and a second oil crisis causing a surge in inflation. The UK Base Rate was also remarkably high in the very late 1980s when it hit almost 15 per cent and, consequently, UK mortgage rates spiked to an even higher rate. After then falling steadily to nearly 5 per cent by the mid-1990s, UK Base Rate remained stable in relative terms, until the Global Financial Crisis in 2007/08. It then fell progressively from 5.5 per cent to 0.5 per cent by March 2009, due to continued weakness in the global financial markets, before eventually falling to only 0.1 per cent in early 2020 since when it continued the longest and lowest interest rate environment known.  

Would it last forever?
Market dynamics soon changed, and we have now seen a succession of eight interest rate rises over the course of the last 12 months as inflation reached a 40-year high. The current level of the UK Base Rate is now 3 per cent, caused by the Ukraine/Russia crisis, high energy price-led inflation and, most recently, the economic turmoil triggered by the UK mini-budget statement on 23 September 2022 leading to a realisation that the Bank of England would need to go harder and faster to tackle inflation. Five-year UK Gilt prices – a widely used reference point for five-year fixed rate mortgage products – quickly spiked to 4.67 per cent, and some forecasters expect the UK Base Rate to increase to as high as 7 per cent.  

Mortgage lenders were quick to respond and, almost overnight, new fixed rate products became scarce. In some instances, the industry saw mortgage rate products increase to over 6 per cent. However, with the ensuing change in government [a new UK government Prime Minister, Rishi Sunak) on 25 October, culminating in a succession of U-turns on fiscal policy leading to a perception of now having “safe hands” steadying the markets, five-year UK Gilt prices have already eased by more than 100 bps, back to pre-mini-budget levels, as can be seen by the following graph:

Source: 5-year UK Gilts, Reuters

The opportunities
In prime markets, which are less reliant on mortgage borrowing in the same way as mainstream markets, the impact of higher rates is far less marked. As some large holders of UK real estate seek to re-balance their books, due to higher yield valuations, so there will be opportunities for numerous ultra-high net worth clients, as real estate assets are unexpectedly shown to the market. 

In some cases, this will be for the first time in very many years. Moreover, while monetary policy is currently being used to control UK inflation, once inflationary pressure eases, so UK interest rates will come down. 

Let’s look at several examples of how wealthy individuals are reacting. One UHNW unexpectedly sees a trophy commercial asset in prime central London being selectively shown to the market. With interest rate rises leading to a corresponding widening of yields, she wants to take advantage of current market conditions. Lower loan-to-value gearing compensates for the higher interest rate and, with the current interest rate curve, she wants to adopt a variable interest rate strategy. 

Another UHNW individual, who has a fixed rate mortgage at an historically low rate and with deposit interest rates, is now in a favourable position. As a result, he decides to invest surplus cash until the maturity of his fixed rate mortgage. At maturity, he will then re-evaluate his borrowing requirements with his relationship manager.

What about savers?
Interest rate hikes are almost always painted as somehow bad, but there are more savers than borrowers in the UK, so that ought to be noted. Higher mortgage rates also help banks' margins and mainstream savers can now take advantage of the current high deposit rates and, where possible, capitalise on this for the next one to two years. 

Looking to the future
Unexpected interest rate volatility has created opportunities for borrowers and savers alike. Monetary policy will continue to be used to control UK inflation but, once inflationary pressure eases and high interest rates start to impact economic growth, so interest rates will come down. Mortgage competition will undoubtedly return, as with all cycles, but don’t expect to see quite the pre-2022 levels of interest rates for a while to come.