Mortgages, pensions and the value of the pound: How the economic turmoil might affect you

12 October 2022, 11:57

Kwasi Kwarteng's mini Budget has had an impact on mortgages, pensions and the cost of living as a whole
Kwasi Kwarteng's mini Budget has had an impact on mortgages, pensions and the cost of living as a whole. Picture: Alamy

By Daisy Stephens

The UK economy has had a tumultuous few weeks.

Listen to this article

Loading audio...

In a bid to tackle the impact of soaring inflation and surging energy prices, Chancellor Kwasi Kwarteng announced a mini Budget on September 23.

But the plans caused the pound to plummet, with knock-on effects on mortgages, pensions and even your household shop.

Here's what the economic turmoil means for you.

What's happened?

In order to understand how and why the economy is struggling, it's important to briefly summarise what's happened.

In September, Mr Kwarteng announced huge tax cuts without saying how the government would pay for them.

As a result, the value of the pound fell because investors had less confidence in the UK's economy.

Government bonds or gilts - essentially an 'IOU' from the government, so investors can lend them money and get it paid back, with interest, at a later date - suddenly became much less appealing for investors.

As a result, the government faced the threat of having a drop in income from this technique.

Also, the interest the government would pay when investors buy government bonds increased.

The Bank of England stepped in and bought the bonds when investors did not want to - but this support is coming to an end on Friday.

All of this has knock-on effects for Brits.

Kwasi Kwarteng's mini Budget spooked the markets, and the impacts are still being felt nearly three weeks on
Kwasi Kwarteng's mini Budget spooked the markets, and the impacts are still being felt nearly three weeks on. Picture: Alamy

Impact of the plummeting pound

Drops in the value of the pound have impacts on ordinary people.

When the value of the pound falls, it costs more in UK currency to import goods from overseas - costs that must then be passed onto consumers.

Goods and services that the UK imports that could go up as a result of the falling pound include petrol, food and technology.

Another impact of the value of the pound is exchanging currency. If you're going away and need to exchange money, you'll find you're handing over more pounds in exchange for the same amount of foreign currency.

Watch: James O'Brien lambasts Liz Truss and Kwasi Kwarteng as he slams 'prioritisation of profit' in UK

Impact on pensions

One of the biggest worries about the current financial situation is the impact on people's pensions.

Like all investments, the value of pensions rises and falls depending on the economic situation.

But the value of them is particularly under threat now because pension funds often buy bonds, as they are seen as safe investments.

They also buy a certain kind of insurance in order to protect the value of the bonds - but the cost of this insurance went up as government borrowing costs increased and the bonds were no longer perceived as safe.

As a result pension funds had to sell bonds in order to pay the insurance costs.

And selling the bonds causes the value of them to fall further, creating a downward spiral.

Business Sec: Pension funds almost went bust due to risky investments

The impact is that people are seeing significant drops in the value of their pension savings.

Calculations by former pensions minister Steve Webb suggested that over 300,000 people may have lost at least £10,000 from their pension funds, according to the i newspaper.

Is my pension safe?

This depends on what type of pension you have, and when you'll take it out.

For example, many private or workplace pensions are covered by the Financial Services Compensation Scheme (FSCS), guaranteeing 100 per cent of your pension if a fund goes bust.

But other pensions, such as self-invested personal pensions, may not guarantee the same level of protection.

Read more: Markets brace for more turmoil after Bank of England's decision to stop govt support sent pound plummeting overnight

Read more: UK economy shrank unexpectedly by 0.3 per cent in August, official figures show

But Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said it was important to remember that pensions are a long-term investment.

By the time you actually need to use your pension, its value may well have returned or even be higher than it is now.

"Pensions are a long-term investment and over the course of a working life savers will experience several periods of volatility," she said.

People are advised to seek professional advice if they are worried about their pension, especially if they are considering withdrawing it.

The Bank of England to protect pensions

Impact on mortgages

Mortgage costs have been surging since the mini Budget.

The cost of government bonds are used to price loans. If bond prices go up, interest rates on mortgages go down, and vice versa.

As a result, a significant fall in the value of government bonds lead to skyrocketing interest rates - which is what's happened.

Andrew Wishart, senior economist at Capital Economics, said: "The increase in interest rates that markets have been expecting over the past few days is going to pass through very quickly to mortgage rates as we've seen with lenders withdrawing their products.

"Mortgage rates rising to about 6 per cent is pretty unavoidable now and that would take the cost of a mortgage on a new home purchase to its highest as a share of income since 2007."

The economic turmoil is having a knock-on effect on mortgage rates
The economic turmoil is having a knock-on effect on mortgage rates. Picture: Alamy

I have a mortgage - what should I do?

If you're on a fixed rate, and are near the start, then there's nothing to worry about for now.

Those most vulnerable are those who are coming off a fixed rate and will need to remortgage soon.

Read more: Coronation for a living costs crisis: Charles demands 'scaled down' one-hour ceremony with only 2,000 guests

Read more: Kwarteng's plans will boost UK growth before sharp fall in 2023, IMF says

Many homeowners will be worried about the future because it is not known whether mortgage rates will get better or worse.

And even if they do get higher, that doesn't mean it's necessarily smart to leave your fixed rate early and remortgage now because there will likely be early repayment charges.

The mortgage broker Private Finance is encouraging those on a fixed rate with a term of 18 months or less "to get in touch and consider their remortgage options now".

More Latest News

See more More Latest News

Rudyard Lake reservoir in the Staffordshire Moorlands near Leek seen with sailing boats moored in the Autumn  Autumnal colours in the woodland trees

Body of boy, 17, pulled from Staffordshire reservoir after search launched on Saturday night

Belarus Election

Belarusians vote in tightly controlled election amid calls for boycott

The Labour MP told Sky News's Sunday Morning With Trevor Phillips that MPs were receiving threats "on multiple issues in multiple directions".

Nandy says 'many, many MPs' have been harassed in the streets as she weighs in on Gaza vote Speaker chaos

Haiti Protest

Caribbean leaders meet Haiti’s prime minister following violent protests

Russia Ukraine War

31,000 Ukrainian troops killed since start of full-scale invasion – Zelensky

Scottish terriers face an uncertain future as the once-popular breed is added to the Kennel Club's watch-list for at-risk breeds.

Beloved British dog breed facing extinction - but Royal favourite terrier sees spike in popularity

Israel Palestinians Truce Talks

Netanyahu says ceasefire deal would only ‘delay somewhat’ an offensive in Rafah

Russia Ukraine War

Ukraine’s defence minister says supply delays are costing lives

Putin, Zelensky and Ukrainian troops

Grim death toll revealed as Zelensky says 31,000 Ukrainian soldiers dead in two bitter years since Putin's invasion

Serbia Croatia

Serbia protests after Croatian minister calls president a Russian ‘satellite’

Labour-run Lambeth Council has raked in up to £50m in fines since introducing controversial low-traffic neighbourhoods (LTNs) in the south London borough.

Labour-run Lambeth rakes in up to £50m in fines since introducing controversial low-traffic neighbourhoods

Namibia Geingob Funeral

African and European leaders attend state funeral of Namibian president

Sadiq Khan has accused Rishi Sunak of 'enabling' Islamophobia

Sadiq Khan accuses Rishi Sunak of 'enabling anti-Muslim hatred' in the Conservative Party

Sloan Mattingly died in a 'freak accident' on the beach

Horrifying final moments of girl, 7, buried alive in sand when hole she was digging on family beach trip collapsed

Donald Trump said Prince Harry betrayed the Queen

'Harry betrayed the Queen': Donald Trump says prince's behaviour is 'unforgivable' as he wades into royal row

Nasar Mohammed Hussein

Urgent manhunt for violent criminal on the loose in London after he took off his ankle tag while out of jail on licence