Savers sell investments to meet rising mortgage costs

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Wealth managers forecast that UK retail savers will keep pulling funds out of investment funds this year, as householders struggle with inflation and rising mortgage costs.

Data from the Investment Association, a trade body, showed that in June retail investors pulled some £986mn from equity and fixed income funds. This represented the first net outflow by retail investors since December last year. 

As rising rates drove growing interest in fixed income, investors focused strongly on UK government bonds with overall net flows into gilts funds in June of £504mn, compared with a net inflow of just £126mn across all bond funds (including gilts).

“We have had a few clients take money out of their portfolios to pay off mortgages,” said Cuthbert Hopkinson, a portfolio manager at Waverton Investment Management. He said people were concerned about rising costs, but higher rates were starting to push down inflation.

High rates and the risk of a slowdown in the UK economy this year have weighed on retail investors as they deal with the trickiest market conditions in more than a decade.

The Bank of England’s monetary policy committee on Thursday raised interest rates by 0.25 percentage points to 5.25 per cent in a sign central bankers remained wary of stubbornly high inflation, despite price increases falling more than expected to 7.9 per cent in June. 

However, rates nearing expected peaks will offer little reprieve to mortgage holders scheduled to renew at levels far higher than experienced in the past decade. The average five-year fixed mortgage reached 6.37 per cent ahead of Thursday’s rate hike, according to date provider Moneyfacts. 

“It’s about making a logical decision, if you’re paying 6 or 7 per cent on a mortgage, it’s better to pay that off because you can’t get that return on an investment at the moment,” said Rachel Winter, a partner at wealth manager Killik & Co. 

Hopkinson said that deposit savings rates were also a draw for investors, as well as short-term gilts and corporate bonds. But he argued equities remained a more effective long-term hedge against inflation.

Investors also used a rally in global share prices to bank gains in June, according to Edward Glyn, head of global markets at Calastone.

Calastone’s data, which also includes small UK institutional investors, showed £588mn in outflows from North American funds as savers took profits — the S&P 500 was up 20 per cent in June on recent market lows seen in October. 

Glyn added: “If and when inflation returns to target, locking in at today’s high bond yields for the medium to long term will offer significant benefits to those investors who have committed capital to fixed income funds.”