The mortgage world has responded to the Bank of England’s decision to increase Base Rate by a quarter point to 4.75 per cent with mixed reactions.
Despite expecting a Base Rate increase for sometime, the Monetary Policy Committee (MPC) surprised consumers and mortgage professionals alike with its premature news of an increase. Having enjoyed a stable economy for sometime now, it was somewhat disconcerting to find out the MPC felt a dose of 0.25 per cent was needed to keep inflation at a healthy level. Hopefully this is a case of prevention being better than cure, rather than an ongoing treatment we’ll come to expect.
Confidence
On a cheerier note, interest rates are generally still the lowest they have been for 20 years and consumer confidence in the housing market is high, especially in the buy-to-let (BTL) market. Even though there has been a lull in the first-time buyer (FTB) market (and this news surely will do little to encourage them), the long-term effect of the rate increase may help re-address UK house prices, which push many FTBs out of the market.
Commenting on the rate changes, Ray Boulger, senior technical manager at John Charcol, says: “UK economic statistics have been mixed over the last month and Nationwide’s July seasonally adjusted house price index showing a 0.8 per cent increase gave those clamoring for a quarter point increase in Base Rate a timely statistic to cite. However, Halifax’s figures only show an increase of 0.2 per cent and over the last three months. Halifax is actually showing a seasonally adjusted fall of 1 per cent. Bearing in mind that monthly house price statistics are volatile, these figures do not justify a rate increase. This suggests the MPC was particularly concerned about the increase in consumer price index (CPI) to 2.5 per cent and expectations that rising energy costs will push it higher.”
The mortgage effect
For those who have taken out mortgages on a tight budget, the 0.25 per cent Base Rate increase comes as a ‘double whammy’ for disposable incomes as energy costs rise to unprecedented levels. Some analysts fear this increase may be enough to tip some people into insolvency.
Hamptons International Mortgage’s technical director, Jonathan Cornell, says: “The long-anticipated Base Rate rise has finally happened as the Bank of England finally bows to inflationary pressures. Clients on tracker or discounted deals will certainly see their monthly payments rise. On a £200,000 interest only mortgage, payments will go up by £41.67 per month, not an earth-shattering amount but potentially significant for those borrowers already over-extended. However, the effect is likely to be mainly psychological rather than financial. Whether this rise will be enough to cool the white-hot housing market remains to be seen.”
On the subject of a cooling in the market, SmartNewHomes.com managing director, David Bexon, says: “The Bank of England’s announcement that interest rates are to be increased by 0.25 per cent can only be bad news, shaking consumer confidence in the market and further hampering struggling groups such as FTBs and young families from stepping on to or moving up the property ladder.”
However, the Building Societies Association (BSA) has pointed out that the rate rise may give people a wake-up call to put some money aside in preparation for less certain economic times and to not over-commit them selves when taking out a mortgage. Like many banks, BSA director-general, Adrian Coles comments: “Around half of all building society outstanding loans are at fixed rates, the highest proportion for a number of years. These borrowers will be protected from the rate rise.”
Unprotected borrowers
Banks and building societies are currently assessing the rate increases, eager to know what the other might do. For lenders, the 0.25 rate increase is an opportunity to increase interest rates above bank base to as much as 0.3 per cent or more. Simultaneously, they tend not to increase the interest rates on savings accounts, so consumers receive a double blow.
Consumers with standard variable rate (SVR) mortgages are particularly vulnerable, as lenders try to keep profits up and may consider changing mortgages. Mehrdad Yousefi, head of intermediary mortgages at Alliance & Leicester, said: “Homeowners and prospective buyers who are looking for stability in monthly payments can take advantage of the short-term fixed rates available in the market and there are still plenty of competitive Base Rate trackers to choose from.”
