Coming to terms with the interest rate rise
It was always inevitable that when the Bank of England finally raised its interest rate there would be intense scrutiny about what this would mean for the business world. Also about the millions of people whose fortunes depend on it.
In our industry, interest rates are all-important. There is no doubt that the Bank’s decision to cut its base rate in the wake of the 2007 crash enabled lenders, advisers and homeowners to get back on their feet.
Ever since low borrowing rates have helped millions of people get onto the housing ladder and then climb up the rungs. This has kept the housing market buoyant. Despite potential threats to the economy such as that posed by the Brexit vote.
The first interest rate rise for a decade caused plenty of ripples last week. Our advisers were kept busy on Thursday and Friday fielding calls from customers wanting to know what to do next.
Would the rise affect the repayments on their home? Should they take action and remortgage? Were the lenders already hiking their own mortgage rates? These were the questions on everybody’s lips.
Our approach is, as you would expect, to put the rate rise in context. Viewed in isolation, the rise is extremely modest. Reversing the Bank of England’s decision to reduce the already-low rate from 0.5% to 0.25% to head off any potentially choppy waters following the Brexit vote last year.
In the short term, since the majority of borrowers who have mortgages are on fixed-rate deals, they will remain unaffected, no matter what the lenders are up to.
There will be an increase in repayments for people on variable or tracker mortgages of around £200 a year per £100,000 borrowed. However, anybody who is now on their lender’s standard variable rate should have already been looking to take action anyway.
Unless they are one of the UK’s unfortunate mortgage prisoners and unable to do anything because they fail lenders’ new affordability criteria. Often they will save money by coming off the SVR and remortgaging.
For my money, we will probably see more interest rates during 2018. However, it will be a while yet before people start to experience a significant effect. This is because lenders already apply an interest rate “stress test” to gauge people’s ability to afford repayments during their application process. Even with this, the rates are still extremely low.
It will be big news when the rate passes the 1% mark. But if you look back at the history books and records tell us that at the time of the last interest rate rise 10 years ago, the rate was 5.75%.
We have a long way to go, so I am not fearing a housing market collapse. Not least because what makes people decide to buy a house, move or sell up are circumstances in their own lives. Not the decisions of Mark Carney and the monetary policy committee.
It may be the beginning of the end for the days of ultra-low interest rates and lenders may already be putting up their rates. The majority of people still prefer to buy a home rather than rent one, so they will find a way to make it happen.
Want to find out more? Our advisers can help you decide what option to go for. Contact us for more information on 01332 821 340 or 0800 103 2655. Alternatively, fill in the form to the right and we will get in touch.