Money Wellness
Image of a white board that says 'cost of living' with a red uptick Wage inflation - what it means for your household finances
category iconcost of living
calendar icon13 Feb 2024

The pace of wage growth slows

The rate at which wages are rising has slowed again according to official figures out this morning from the Office for National Statistics (ONS).

Pay, excluding bonuses, grew by 6.2% in the last three months of 2023, compared with the same period the year before.

So, after taking price rises into account, UK pay went up 1.9% in the final quarter of the year. This resulted in a fall in wage growth from 6.6% to 6.2% - still higher than economist expected.

The number of vacancies also fell for the 19th time in a row, down 26,000 to 932,000.

Wage growth tends to suggest a buoyant employment market, which is not necessarily what the Bank of England (BOE) wants to see when trying to cool inflation.

However, according to the BBC, these figures will be particularly troubling for the BOE as they might not be wholly accurate. This is because the ONS is in the process of changing the way it records data.

The BOE held interest rates at 5.25% the last two times it met after successive rises since August 2023.  

It uses interest rates to control the economy – increasing them can slow down business growth and household spending, which in turn cools inflation.

The latest figures suggest the employment market is remaining resilient, which will not be welcome news to millions of homeowners who’re desperate for interest rates to fall to bring down their mortgage payments.

What is inflation?

Inflation is the rate of increase in prices over a given period of time. Inflation shows movement - either up or down - in how much it costs to live in the UK.

How do employment figures relate to inflation?

In times of low unemployment, employers typically need to pay higher wages to attract employees, which leads to rising wage inflation. Rises in wages lead to higher prices for products and services, pushing the country’s inflation rate higher.

Why are inflation and interest rates linked?

The inflation rate and interest rates are intrinsically linked. When inflation is high, interest rates tend to rise too – so although it costs you more to borrow and spend, you could also earn more on the money you save. When the inflation rate is low, interest rates usually go down.

Will interest rates remain high this year?

Economists predict that interest rates will remain around the 5.25% until autumn 2024 and will then fall gradually to 4.25% by the end of 2026.

What do high interest rates mean if you’re due to remortgage in 2024?

More than 1.5 million homeowners are due to reach the end of their fixed-rate mortgage in 2024 – many of whom will have been on sub 2% deals. These households will find their payments doubling overnight.

January saw a lot of movement in the mortgage market, with some lenders reducing fixed rates. However, more uncertainty has seen these reduced rates withdrawn again.

With so much fluctuation, homeowners are advised to shop around early – at least 6 month prior to their current fixed rate deal ending- to find the best deals. And rather than opting for a fixed five- or ten-year deal, it might be wise to fix for just two years to tide you over as rates are due to fall further by 2026.

What help is available for homeowners struggling to pay their mortgage?

If you’re having trouble paying your mortgage, you need to speak to your lender – don’t bury your head in the sand.

You are protected by the mortgage charter, a set of standards agreed last year by the chancellor, major lenders, and Financial Conduct Authority (FCA).

Under the charter, anyone worried about mortgage repayments can contact their lender for help and guidance without it impacting their credit file.

Lenders must support customers who are up to date with their payments to switch to new mortgages at the end of their existing fixed rate deal, without undergoing affordability checks.

They must also help anyone struggling by offering to extend their mortgage, so the payments are reduced, allow them to switch to interest-only payments, or have a payment break for six months without it affecting their credit rating.

Assess your household budget

Go through your household finances in detail to see if any savings can be made. Any spare cash you free up can go towards your mortgage payments. You can use our free budget planner to make this easier.

It’s also worth checking to see if you’re entitled to any benefits - nearly £19 billion goes unclaimed every year. Use our free benefits calculator to see if you should be claiming more.

Support for Mortgage Interest (SMI)

The Support for Mortgage Interest (SMI) scheme was created to help households who receive certain benefits, such as income support, jobseeker’s allowance or pension credit.

The support is essentially a loan with the payments being made directly to your lender. It helps to cover interest payments on up to £200,000 of your mortgage – or £100,000 if you’re receiving pension credit.

The loan isn’t interest free. You’ll have to pay if off eventually with the interest at around 3.03% (this could change and go up and down) being added to the total amount you’ll repay.

Compared to normal forms of credit though, an SMI loan can be cheaper and more flexible, and importantly – it won’t affect your credit rating.

Prior to last year’s autumn statement, you needed to have been claiming benefits for nine months to be eligible for help. However, Jeremy Hunt changed this, and you now only have to wait three months before you can claim.

Have insurance – use it!

Millions of people choose to pay for payment protection insurance. If you have a policy like this, check to see if it can help you. Normally, it will only pay out if you can’t work due to accident, sickness and sometimes unemployment but every policy is different and it’s worth checking to see what you’re covered for.

There’s three different polices that might pay out including mortgage payment protection insurance (MPPI), accident, sickness and unemployment policies, or income protection insurance (IP).

Avatar of Caroline Chell

Caroline Chell

Caroline has worked in financial communications for more than 10 years, writing content on subjects such as pensions, mortgages, loans and credit cards, as well as stockbroking and investment advice.

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