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The end of zero interest rates: How millennials can adapt

The end of zero interest rates: How millennials can adapt

With all signs indicating the end of zero interest rate policies, finance experts share how millennials and Gez Z can adapt to high interest rates and inflation

For anyone under the age of 35, the idea of interest rates being anything other than near-zero may seem like a foreign concept. Adapting to a world with higher interest rates will take a whole new mindset.

For Millennials and Gen Zs to successfully adjust—and refute their patronising nickname as "Generation Rent"—they must acknowledge and assess the major shifts in incentives surrounding saving, spending and lifestyle choices.

Like many other central banks across the world, the Bank of England drastically cut interest rates to near-zero in response to the great financial crisis of 2008. Subsequently, the past fifteen years have been unique: this period marked the first time since the bank was formed in 1694 that rates have been below 2%.

However, this has reversed in the past 12 months with the surge in inflation. As a result, young people are likely to face significant consequences from both the low rates prevalent in the 2010s and the rapid rise in rates at present.

Consequences of near-zero interest rates

Millennial priced out of buying home by near zero interest ratesLow interest rates meant that many potential first-time buyers were priced out of a mortgage

Although low interest rates may prove beneficial for those who have already taken out a mortgage and other loans, it often results in minimal returns on savings accounts.

Young people have previously no benefit from interest on low-risk savings accounts, but instead were induced to participate in riskier investments, like equities or Bitcoin.

"House prices tend to rise in a low interest rate environment due to the drop in mortgage interest payments"

Moreover, house prices tend to rise in a low interest rate environment due to the drop in mortgage interest payments. According to an ONS survey, this caused a 71% jump in house prices since October 2008. While mortgages became more affordable for some, the increase has priced out first-time buyers.

What has happened since spring 2022?

In the last year, this has completely reversed. Interest rates are struggling to keep up with inflation. They have risen at the fastest rate ever in percentage terms, from 0.25% in February 2022 to 4.5% in May 2023.

This is principally because of inflation being elevated by restricted supply chains, due to COVID-19, and the Russian invasion of Ukraine. This decrease in supply and consistent demand has pushed inflation to levels not seen since 1990.

"Higher interest rates can create a more conducive environment for saving"

Higher interest rates can create a more conducive environment for saving: individuals have a greater incentive to set money aside that will generate higher returns.

However, this presents a challenge for those under the age of 35, who often have student loans and other financial commitments, on top of escalating rent, income tax and NI contributions.

As a result, many Millennials and Gen Zs cannot afford additional savings or pension contributions, missing out on valuable years of potential investment growth.

Financial habits of Millennials and Gen Z

Millennial first time buyer in new home with help from bank of mum and dadNear half of first-time buyers have had help from family to purchase property in recent years

Gary Hemming, money expert at ABC Finance, has noticed a shift in priorities among young people, who are questioning the value of buying property. 

"Simply put, the level of sacrifice needed to save a deposit, take on significant debt and property maintenance costs will become a benefit that’s not worth the level of sacrifice," he says.

Although it sounds morbid, those who are set to inherit are waiting to purchase property with those funds.

Some parents or family members are choosing to gift now. Much to my surprise (and jealousy), a school friend of mine recently bought a flat, aged 25. By receiving a large sum from her parents, she was able to provide a down payment and get a fixed mortgage at a rate of 3.64% for five years.

"Between 2022 and 2024, 47% of first-time buyers will have had help from a parent or other family members"

Secured in September 2022, she is fortunate to have certainty. Others with large loans and tracker rates may not be so lucky.

According to Savills, between 2022 and 2024, 47% of first-time buyers will have had help from a parent or other family members. Yet, not everybody is lucky or privileged to be in that position, as Mark Harris, chief executive of mortgage broker SPF Private Clients, points out. 

"Younger people are having to live at home for longer, and many worry that they will never get on the housing ladder unless they have significant financial assistance from the 'Bank of Mum and Dad'," he says.

An alternative is a deposit-free mortgage. Recently, Skipton Building Society launched a 100% mortgage for those who can prove consistent rent payments and have favourable credit scores.

Yet, these loans carry higher interest rates than the average fixed rate and are reminiscent of the loans that precipitated the 2008 financial crash.

It is crucial for my generation to evaluate the lasting implications of a high-interest environment rather than relying on successful strategies from the last 15 years.

Both high and low interest rate environments offer advantages and disadvantages, and it is essential to consider these factors carefully. It is a different world and therefore we need to adapt to it.

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