Kevin Morgan, managing director of Consilium Financial Planning said: “As financial advisers we need to be aware of the potential of higher interest rates and its subsequent effect on affordability.”
Morgan explained that with typical interest rates averaging approximately 4.50 per cent last year, they appeared to be creeping towards a 5.50 per cent average. This was costing consumers an extra £2,000 a year to take out a mortgage of £200,000, with fears this may rise to an extra £4,000, if interest rates were to rise a further 1 per cent over the next 12 months.
Short to medium-term money market swap rates, which are trading higher than a year ago, were a major reason behind the tip-toeing forward of interest rates. With many lenders buying their money in advance on the money market, it has been claimed that interest rates would rise as lenders recouped the costs of the money they bought.
Mike Sammon, manager of Thornley Grove Financial Services, said: “Swap rates have been edging up in the past four months, which means short-term fixed rate money has started to increase. Last year you could happily get a two-year fixed rate of approximately 4.30 per cent, while now you’re looking at 4.70 per cent and above, apart from a few lenders who have managed to obtain cheap allocation money.”
Taking an alternative view on the reasons behind a possible interest rate increase, Tony Capon, head of intermediary sales at Salt, said: “Prior to the last few weeks, our view was that swap rates had ran a bit ahead of themselves and the markets always over-react. It is more likely to be global events like the crisis in the Middle-East and the consequent increase in oil prices that have caused this uncertainty. On top of this we have seen a surprising increase in inflation.”
