With the Bank of England likely to increase the Base Rate this Thursday, will any increase make a difference to our economy, or just end up pushing Mortgage Rates beyond what we can afford?
Bank of England Base Rate and Mortgage Rates are not exactly in bed with each other. With the vast majority of Mortgages arranged on a Fixed Rate basis, those are funded via the Bond / Gilt markets, rather than linked specifically to the Base Rate. But there will be a correlation given that if Base Rate is increasing, the same factors will be driving up the Bond Market in a similar fashion.
I think we need to have a look further than residential mortgages – the worldwide economies similar to the UK, such as the USA, are running at 3.25% as of this morning, Canada at 3.75%, and Europe running at 2% (an increase of 1.25% in October). Our base rate will need to be close to these figures to attract inward investment and pricing of imports & exports.
And for businesses in the UK, most of their borrowing will be linked to the base rate as there isn’t a breadth of residential mortgage products in this sector. For the economy to continue to improve, borrowing costs can cripple a nation if they are not careful, so there needs to be a careful balancing act performed here.
We have all become used to low-interest rates generally – since 2008 we have seen arguably the cheapest period of borrowing ever. Because of this, we have afforded to buy more expensive cars, and enjoyed a more disposable lifestyle – for many, their mortgage costs have never been above a rate with a ‘2’ at the front. Rate Shock is inevitable, indeed mortgages have been stress tested at rates of around 6% for many years, to make sure they are affordable for this situation. And during that time we have all seen our homes increase substantially in value, tax-free; and landlords, have had both property value appreciation and profit every month. We have had good years, please don’t forget!
What we need to do is to review our whole expenditure – do we really need the £800pm car (and we have seen many of those in the last few years!). Personal Debt has also increased in the last few years, do we need to be paying this off rather than borrowing more? What else is on your bank statements (and when did you last look at them…!)
So yes, we may see a little wobble of Interest Rates over the coming weeks, but they will settle, clients will need to budget for rates in the range of 3-6% rather than the 1%’s and 2%’s, but also its time to look at everything you pay for, prioritise, and if rates ever go back to the really cheap range, put a bit extra on your monthly payments just so you get used to the ‘normal’ cost of your mortgage – you’ll pay it off a bit quicker too 🙂