Mortgage rates and the economy – proactive steps offer better security

Mortgage lenders are removing offers and rates are rising, but what does that mean for your mortgage? Peter McGahan explains.
mortgage rates
Rising mortgage rates could be a headache for many borrowers.

Rates are rising for sure, and with the Bank of England’s announcement that the base rate will now rise by 0.5 percentage points to 2.25 per cent, the highest level since 2008, homeowners and investors alike will really be counting the pennies.

Last week, I was interestingly asked about an onward index swap (OIS) curve and what that meant for interest rates! Whoop. As you can see, it’s a very specific and clever question(!), but what does that actually mean, and is it relevant in determining rates / inflation and in turn the value of your homes? Remember, the UK is a debt driven economy, and the comfort of having equity (gap between your home value and debt/mortgage) is the big confidence driver for the economy. In reality it should mean nothing other than, ‘you have debt of x amount’.

Rising mortgage rates for the long term?

The OIS is a ‘forecast’ of where interest rates may be at some point in the future so in looking at that curve for the coming years, it’s clearly downward. The graph is hefty in its spike upwards now, topping at around 4.5 per cent but nosediving over the coming years and levelling out in five to six years’ time at around 2.8 per cent.

Do I give this much credence? Hardly. It’s like predicting the weather in two years by sticking a wet finger out of your car window now. For example, the same (one month old) predictive curve on the date of the August 22 monetary policy committee, showed rates peaking at close to the new low of 2.8 per cent, and falling to a low of 1.8 per cent. That’s quite a gap within a month (see note above re: wet finger).

I stand by the fact that much of the inflationary pressures are temporary and have a cause, a cause that can be remedied with the right appetite and approach.

This does not help a homeowner or borrower, however. This effectively becomes a gamble, and the odds are the loss of a house and security, or at best having to sell it down in a market where the buyer is the winner. History doesn’t repeat itself, but it often rhymes.

Plan ahead for better security

Better to plan and calculate than risk, so as I stated over the last two years, grabbing a slightly longer fixed rate would have been a good move so you know what you are budgeting for.

The FCA state they expect base rates to average at three per cent, ranging from 2.5 to four per cent, and that cost will naturally be passed to the payment rate for consumers. Personally, I see the base rate peaking closer to 4.5 per cent. When the BOE rate was at 0.1 per cent, the larger lenders had a standard variable rate (SVR) of around 3.59 per cent, so around 3.49 per cent higher. When the base rate rose to 1.75 per cent, the SVR’s are around 5.24 per cent – amazingly, 3.49 per cent higher. Do your numbers on a base rate of 4.5 per cent!

Capping energy bills will lead to inflation softening quicker, but there is concern on sterling once again. If the central bank is not acting quickly, sterling will come under more pressure as investors sell it. As the UK is a net importer, confidence and the value of sterling is crucial as every movement down, forces the costs up as they are bought in a more expensive currency, driving inflation higher and in turn the pressure on interest rates higher.

It’s a negative feedback loop, and it’s as attractive as a ‘reality’ TV show.

The UK’s inflation remains the highest in the G7. Liz Truss’s policies arrived one day after the Bank of England’s decision and those policies are inflationary and likely to make the BoE want to increase rates more. Strange that the Bank wants to slow spending, but the government wants to give people more money to spend more to avoid an economic downturn.

I need another wall to bang into. This one is broke.

I can’t recommend enough seeing an Independent Financial Adviser now to ask about how this will impact you.

For example, the broker can take your loan out to the market to see who is offering the best terms and then go back to your lender to see what terms they will offer. If the rate is more favourable, you can book it now, as much as six months ahead of time. This way you can benefit from the current lower rate but lock in any rate ahead of any further changes.

If you have a mortgage query, talk to WWFP independent mortgage director Pat Greene. Please email Pat directly on [email protected] or call 01872 222422.

If you found Mortgage rates and the economy – proactive steps offer better security interesting, you’ll find more from Peter McGahan on the state of the UK housing market on our Finance channel.

Tags: , Last modified: September 28, 2022

Written by 5:37 pm News & Views, Property