Protect yourself from Labour’s economic meltdown: As markets wobble, what it means for your mortgage, retirement, savings and house price – revealed by experts

Bond market mayhem and the soaring cost of government debt has consequences for almost all aspects of our personal finances – from rising mortgage rates to more expensive holidays abroad.

UK Government borrowing costs hit their highest level since 2008 earlier this month in a sudden surge, although they had been rising steadily for several months.

They rose as investors worldwide grew increasingly worried about the Government’s economic strategy as well as global uncertainty and the threat of inflation staying higher for longer.

They fell back slightly last week, but nonetheless the cost of borrowing for ten years, at 4.67 per cent, is still close to 20 per cent higher than a year ago.

And households are starting to feel the effects. However, that doesn’t mean you’re powerless. Here’s what it means for your finances – and what you can do to protect yourself.

And you can read money guru Jeff Prestridge’s explainer of why bond markets are jittery here.

Mortgage rates rise

Swap rates, which are used by lenders to price their mortgage deals, inched up following the bond market turmoil.

That has already translated into higher mortgage costs.

A swathe of major banks including HSBC, Santander and TSB announced rates rises last week. Santander made the chunkiest, increasing a selection of its residential products by as much as 0.34 per cent on Friday.

Brokers anticipate more lenders will follow suit, with NatWest tipped to increase rates in the coming days.

However, the outlook could improve later this year as the Bank of England starts to cut interest rates.

David Hollingworth, associate director at broker L&C Mortgages, suggests that borrowers whose current mortgage expires in the next six months should lock in a new deal now. ‘Then, if rates do rise over the coming weeks, they have secured the best deal they can,’ he says. ‘And if rates fall, they can ditch it and find an even better one.’

Holiday cash falls

The pound has fallen by around 4 per cent against the US dollar and close to 2 per cent against the euro this year following the bond market mayhem.

Lee Hardman, a senior currency analyst for financial group MUFG, says that if the bond market turbulence continues there is a risk that the pound will weaken further – especially against the dollar.

However, he says holidaymakers planning to visit the US in the summer may wish to hold out before buying their dollars.

‘You may want to wait until closer to the summer as by then hopefully the pound will have regained some strength,’ he says. ‘The dollar rose by around 5 per cent after Trump’s election on the basis that his policies would be positive for the US dollar. That has been priced in already. We think that as we move through the year, we will see the strength reverse as a result of some disappointment that all these policies may not be realised. Plus, Trump is likely to want a weaker dollar to support manufacturing so he is likely to push back if it gets too high.’

But holidaymakers going to Europe in the summer may want to buy some euros now, Hardman adds. That is because the pound does not look weak against the euro even following last week’s drop in value, so is less likely to strengthen over the coming months.

Retirement incomes rise

Those looking to lock in a retirement income for life may be able to secure the best deal since 2008.

An annuity allows you to swap a pension lump sum for a guaranteed annual income – either for a set period or until the end of your life.

Retirees typically buy them with the pension funds they have built up over their working lives.

Annuity providers buy long-term gilts to generate returns to pay customers the income that they have promised. As yields rise, so do the incomes that annuity providers can offer.

As a result, annuity rates have risen by 70 per cent since their low in 2020, according to William Burrows, who runs The Annuity Project and is a financial adviser at Eadon & Co.

‘The outlook for 2025 is very uncertain and now may be a good time to lock into the high annuity rates,’ he says.

Someone buying an annuity for £100,000 at the age of 65 today could secure an annual income of £6,465. This assumes that it pays out the same sum every year, and continues to offer two-thirds of the income to a spouse who is five years younger when the annuity holder dies.

The same annuity taken out in 2020 would pay out just £3,800.

Someone buying an annuity today would be able to secure a better rate than they would have done for years. However, whether one is right for you is down to your own circumstances and requires some great consideration.

The level of income that you manage to secure is life-changing. Unlike many other financial products, once you have bought an annuity you can’t ditch it and buy another if a better one comes along. The income that you lock into is the income you receive for life. Buying a good one can leave you with a more comfortable retirement for the rest of your life – and even for your spouse if they outlive you.

For more on what you need to consider, read our guide here.

Long-term savings rates boosted

Rates on longer-term savings bonds have risen slightly in recent days because of the money market turmoil.

Fixed-rate bonds lasting more than one year rose to 3.91 per cent last week, while the average one-year fixed rate bond remained unchanged at 4.18 per cent, according to rates scrutineer MoneyfactsCompare.

The best five-year bond is currently 4.55 per cent, offered by Birmingham Bank, followed by Shawbrook, SmartSave and Close Brothers at 4.52 per cent.

Longer-term bonds are a good option if you think interest rates are likely to fall over the next few years and are happy to lock your money away in exchange for the security of receiving a guaranteed rate.

Easy-access rates offer more flexibility, but lower rates. Rates are likely to fall further still as the Bank of England cuts the base rate. The average easy-access account currently pays 2.89 per cent, according to MoneyfactsCompare.

Rachel Springall, finance expert at MoneyfactsCompare, says: ‘Savers may be concerned about the expectations for interest rates to come down this year, so a longer-term fixed bond could become more desirable.

‘However, their popularity hinges on whether savers hunting for a guaranteed return feel content to lock their cash away for longer.’

Relief for homebuyers

Homebuyers may find that they can borrow more than in the past, while first-time buyers who may have struggled to get a mortgage could be thrown a lifeline.

That is because the Government last month wrote to all of the UK’s main regulators to come up with ideas they could enact to help boost economic growth.

Last week, the financial watchdog, the Financial Conduct Authority, responded with its ideas.

One was a relaxing of mortgage lending rules, which were introduced in the wake of the 2008 financial crisis to protect borrowers from reckless lending.

The rules require lenders to ensure that customers would still be able to repay their mortgage even if rates escalated.

They appear to have worked as – although millions of households have felt their finances pinched by rising mortgage rates – defaults and repossessions have not risen substantially.

Therefore, the FCA has questioned whether the rules could be loosened. That could make it easier for first-time buyers with smaller deposits to get on the property ladder, and allow some borrowers to take on higher debts compared with their incomes.

FCA chief executive Nikhil Rathi said: ‘We will begin simplifying responsible lending and advice rules for mortgages, supporting home ownership and opening a discussion on the balance between access to lending and levels of defaults.’

The Chancellor’s growth mission, which has prompted this response from the FCA, preceded the bond market mayhem.

However, the turbulence of the last three weeks has made this ambition even more urgent.

That is because Rachel Reeves has pledged to abide by her own so-called ‘stability rule’, which promises that day-to-day spending must be met from revenues – in other words it cannot be paid for through borrowing.

But, as the cost of borrowing rises, so does the proportion of revenues that goes on servicing that debt – resulting in less money left to cover day-to-day spending.

The Chancellor is at high risk of busting her own spending limit. That leaves her with four options. The three she wants to avoid are: breaking the rule, cutting day-to-day spending, or increasing taxation to boost revenues. The fourth, more palatable option is to increase growth. Creating wealth would mean that there would be more money to cover day-to-day spending without having to cut spending or increase tax. So you can see why she’s looking for growth anywhere she can.

Contactless limit

Another unlikely fallout of this increasingly urgent growth agenda could be an increase to the £100 cap on contactless spending.

Among its ideas to boost growth, the FCA also mooted removing the £100 limit when using contactless technology to pay using a debit or credit card.

It said this would allow ‘firms and customers greater flexibility, drawing on US experience, and levelling the playing field with digital wallets’.

It did not detail how this could materially impact growth, but this does not mean the idea would be rejected.