How does a recession affect mortgage and interest rates? - Times Money Mentor (2024)

We explain what a recession, is as well as what downturn means for your money and the wider economy.

The UK economy entered recession at the end of 2023 following two consecutive quarters of negative economic growth. However, it proved short-lived, with the UK returning to growth in the first quarter of 2024.

UK GDP dropped by 0.3%between October and December last year, following a 0.1% fall between July and August, according to official figures. Despite the recession at the end of the year, GDP actually grew overall in 2023 by 0.1%.

The UK exited recession and returned to growth in the first quarter of 2024 – growing 0.7% according to the Office for National Statistics (ONS). Since then the growth solidified – with the ONS reporting the second quarter saw 0.6% GDP growth.

Analysts called the recession mild, but despite inflation falling back to the Bank of England’s 2% target, the public still faces financial challenges with increased housing and energy costs.

This article covers:

• What does recession mean?
• How will the recession impact mortgage rates?
• How would a UK recession affect me?
• What does GDP mean?
• What is the UK economic prediction for 2024?

Read more: CPI vs RPI inflation: what’s the difference?

What does recession mean?

A recession is defined as when an economy – as measured by Gross Domestic Productor GDP (a measure of all the goods and services that a country produces) – shrinks over two consecutive quarters, or six months.

When an economy contracts, it is usually a sign that consumers are spending less. This has a knock-on effect on businesses, which produce less in the way of goods and services and spend less on staff.

A recession can affect our earnings and employment. We have more on how a recession can affect you below.

The Bank of England put up interest rates fourteen times in a row since 2021. This was designed to reduce inflation by trying to curb the amount of money that we spend by making borrowing more expensive and saving more rewarding.

If we have less money to spend, the demand for goods and services falls. As a result, businesses are likely to produce less, thereby shrinking the economy.

However, the Bank of England doesn’t want to hit the economy too hard by raising interest rates; it wants to strike a balance of lower inflation without too much negative economic growth.

How will a recession impact mortgage rates?

When an economy is in recession, a central bank can choose to lower interest rates. The theory goes that by making borrowing cheaper, we and businesses will have more spare money to spend on getting the economy going again.

Lower mortgage rates tend to follow lower interest rates, because it becomes cheaper for banks themselves to borrow money, the savings of which they can pass on to us.

The UK entered a recession at the end of 2023 but the Bank of England held off cutting the base rate until August 2024. This is largely down to inflation falling slower than hoped.

Find out more about when interest rates could fall.

How else does a UK recession affect me?

The problems caused by a recession can trickle down to our everyday lives and the impact can be felt for years, even once the economy starts to recover.

While the current recession is not as severe as some of those experienced in recent decades, there are a number of ways one can affect your life:

• You or a member of your household could lose your job
• It might be harder to get a promotion or a pay rise
• You could struggle to find a new job as vacancies disappear
• If you run a business, you might have to let go of staff
• Your company could collapse
• You could be made bankrupt
• Banks are less likely to lend you money
• Local shops or services might close down
• Highstreets could become less vibrant

A recession won’t affect everyone equally. In fact, an economic downturn can create more inequality in society, widening the gap between the rich and the poor. We have some tips here on how to get a pay rise.

People who have savings and a more secure (or diversified) income will be better off than those who don’t.

How long does a recession last?

While you need two consecutive quarters of negative growth to make a recession official, it can go on for years. Unfortunately, there’s no way of knowing for sure when a recession will end.

Between 1990 and 1991, there was a recession that lasted 15 months. The great recession of 2008 went on for the same length of time.

When there was a recession sparked by the coronavirus pandemic in 2020, it lasted just six months.

What does GDP mean?

GDP stands for gross domestic product and is a key measure of how well an economy is doing, and therefore whether recession is likely. It’s roughly equivalent to a score that shows how much does a country produces overall.

When GDP rises over time, this can sometimes be a sign that businesses are thriving, people are getting a little richer, and means the economy is growing. If it falls or stays low, the economy is declining or stagnating.

Policy makers and businesses use GDP to figure out what action they can afford to take, such as how much a government should spend or tax people and whether businesses should invest more to grow and hire more staff.

The latest GDP figures show that the UK economy rose by 0.6% in the first quarter of 2024. The figure comes after negative economic growth of 0.3% was recorded in the fourth quarter of last year.

How is GDP worked out?

The Office for National Statistics (ONS) gathers data from thousands of companies around the UK to come up with a GDP figure every month. It also looks at the activity of the governments and individuals within the UK.

Economists tend to focus more on the quarterly (every three months) rather than the monthly figures.

There are actually three ways of measuring the economy:

• The total value of goods and services produced
• Everyone’s income that is generated by the production of goods and services
• All the money spent on goods and services (minus the value of imports, plus exports)

These are known as the output, income and expenditure measures of GDP.

In theory, all of these three different measures should give the same figure.

Seven ways to recession-proof your finances

Many of the ways to recession-proof your personal finances involve simple strategies:

1. Pay off your debt

Having debt isn’t a problem when times are good and you can afford to meet your repayments every month. But a recession increases the risk of losing your job. If you were made redundant, could you afford to make your repayments?

If you have expensive debt on credit cards and loans, look at paying this off quickly if possible.

Consolidating your different card debts onto one of these top rated credit cards, which have an interest-free window lasting longer than a year, might be worth considering.

If you can avoid it, don’t take on any new debt — and make sure you aren’t spending more than you can afford each month. If you are heavily reliant on debt to make it through every month, our article gives you guidance on how to get help.

2. Reduce your outgoings

The cost of living crisis is forcing many families to tighten their belts. If you haven’t yet taken a hard look at your finances, now is a good time to do so.

Even small outlays such as a £3.50 coffee can add up to a lot if you spend this on a regular basis. Writing down your income and all of your outgoings can put things in perspective too. A budgeting app can help.

Reducing your outgoings will mean that you might have more money to put aside to give yourself a financial buffer during a recession.

3. Build an emergency fund

Do you have savings to fall back on if you should you lose your job?

It’s a good to aim to build an emergency fund equal of between three and six months’ of essential outgoings. This should be kept in an easy-access savings account so you can dip into it as you need.

If times get tough, this emergency fund could give you a financial cushion. If you find saving a struggle, check out our 20 simple ways to save money.

4. Top up your earnings

Having multiple sources of earnings could protect you if one dries up, so you might want to diversify. For inspiration, check out our 13 ways to boost your income.

When recession strikes, it’s important not to take your job for granted. If you decide to head for the door when other businesses aren’t hiring, you could struggle to find a new position.

We have more on side hustles and the crucial £1,000 tax rule.

5. Invest for the long term

If you have followed the tips above and still have disposable income, you could consider investing.

Contrary to what you might think, putting money into assets such as shares during a recession could be a good idea. You might be able to buy some bargains but it is important to research those businesses that seem fundamentally sound and look likely to bounce back from the stock market turmoil.

You should also remain invested for at least five years, even when the markets get spooked, to give yourself time to ride out the downturns and enjoy the recovery.

It’s also never sensible to put all your eggs in one basket by sticking to a small handful of companies or market sectors. This is especially true during a recession. If you invest in a couple of companies and they both collapse, you could suffer severe losses.

We go into detail about the principles of investing in our beginner’s guide. You also might want to read our article on how to invest during a recession.

6. Protect your retirement

It might be tough right now but you should resist the temptation to cut your pension contributions. There might be other areas of your monthly spending you can look to cut first.

If you have cut back already then start topping up your pension again as soon as you are able.

A 25-year-old who reduces their pension payments by just 2% could miss out on £60,000 across their lifetime, according to wealth manager True Potential. Read our guide on how a pension works.

7. Avoid making impulsive decisions

Making impulsive decisions about your finances is not recommended at any time – but a recession is the worst time of all. You need think logically about your finances and avoid taking big risks.

You might want to delay big financial decisions for now. Focus on putting yourself in a good position instead, to give you room for manoeuvre when times get tough.

Will the economy get better in 2024?

The Bank of England decided to cut the base rate of interest by 0.25% in August 2024 to 5% – the first cut in four years. It is hope that this represents a turning point for the UK economy.

The cost of living has fallen to ‘normal levels’ with headline CPI inflation measure currently at 2.2%, down from its recent peak of 11.1% in October 2022, while wage growth – which can push inflation up – has slowed.

In July, the International Monetary Fund (IMF) raised its growth forecast for the UK economy from 0.5% to 0.7% over 2024, while Deutsche Bank economists now expect growth of 1.2%, up from their earlier 0.8% forecast.

Next year is also looking brighter with Goldman Sachs increasing its 2025 forecast by 0.1 percentage point to 1.6%.