As you’ll know, the Bank of England raised interest rates to 5.25% on 3 August, up from 5%. This was the 14th consecutive rise since December 2021.
The central bank continues to do its best to try to bring inflation down. The latest figures from the Office for National Statistics were positive, showing that inflation was 6.8% in July, down from 7.9% in June and 8.7% in May, so it’s possible that the next decision on base rates on 21 September will look more rosy too.
In the meantime, what does this mean for British families?
The economic ripples caused by fluctuations in interest rates can significantly impact different age groups in distinct ways. One of the most noticeable sources of friction has emerged between those who have mortgages – typically in their 40s – and those who have already retired and are comparatively better off – typically those in their 60s and 70s. This stems from the fact that rising interest rates predominantly affect mortgage holders, leading to a growing divide between generations.
This can make things very difficult at an already challenging time, and affect our overall wellbeing. So let’s take a closer look in order to try and find a way forward.
So why are interest rates getting the blame?
This is mainly due to their disproportionate impact on people with mortgages. Those in their 40s, often in the prime of their careers and building families, are more likely to be homeowners with mortgages.
When interest rates climb, their monthly mortgage payments increase, often straining household budgets that are already stretched to accommodate various financial responsibilities. In June the Institute of Fiscal Studies predicted that Interest rate hikes could see 1.4 million people lose 20% of their disposable income.
On the other hand, retirees who are financially secure may be less affected by rising interest rates. Having paid off their mortgages or possessing substantial savings, they are buffered from the immediate repercussions of higher borrowing costs. This divide becomes more pronounced as economic shifts place different generational groups in contrasting financial situations.
Financial burden vs financial freedom
One of the key factors amplifying generational conflict is the differing financial burdens faced by these age groups.
For middle-aged people with mortgages, higher interest rates can mean the difference between maintaining financial stability and falling into debt. The struggle to balance increased mortgage payments with other essential expenses can be extremely stressful. According to The Times, the Citizens Advice has said homeowners across the country are living on ‘negative budgets’, where their income is no longer meeting their basic costs because of rapidly increasing interest rates.
Contrastingly, retirees who have diligently saved and invested over the years find themselves in a position of financial freedom. With fixed incomes, they have a sense of security that enables them to navigate interest rate fluctuations with relative ease.
While it’s true that they may currently be experiencing reduced returns on certain investments, their overall lifestyle is less likely to be disrupted by the economic consequences of rising interest rates.
Societal implications
The conflict arising from divergent impacts of rising interest rates extends beyond individual financial struggles. It can shape societal dynamics and potentially exacerbate existing generational divides.
The feeling of unfairness can lead to strained family relationships and contribute to a perception of inequality between age groups. This, in turn, can influence political attitudes and public sentiment on economic policies, further shaping the social landscape.
So how do we ease the tension?
Addressing the generational conflict caused by rising interest rates requires a nuanced approach that acknowledges the differing circumstances of various age groups.
Governments and financial institutions can play a role in mitigating these conflicts through targeted policies. For example, providing assistance programs or flexible mortgage terms to middle-aged people facing higher payments could alleviate some of the stress associated with rising interest rates.
Additionally, developing financial education across generations can help people to better understand the economic forces at play and make informed decisions.
We can also help. We work with people who are managing their investments in a changing interest rate environment, explaining the best course of action and discussing their options with them. If you know of anyone who would be interested in chatting to someone about their concerns, please feel free to forward our details to them.
And if you have any worries of your own, please get in touch.
Finally, we’d also promote open dialogue between generations. A problem shared is a problem halved as the old adage goes, and involving everyone in discussions – no matter what they’re about – can only benefit understanding and collaboration.
