Homebuyers can wave goodbye to mortgages at just 0.99%. Savers can say hello to better rates for the first time in seven years. Investors will wobble as bond funds dive, but DMZ argue that it’s estate agents who have the most to fear from rising interest rates.
Even a small rise in the base rate could send shockwaves through the property market, not because mortgages suddenly become unaffordable, but because the current extraordinary level of house prices rely on one factor above all: confidence. If homebuyers think rates are going to start marching up, confidence in the market may evaporate.
There is every reason to expect the next movement in interest rates will be a hike. Firstly, inflation is going to come back and there are limits to which the Bank of England will be able to “look through” an inflationary spike, especially if it starts to feed into wage growth. Secondly, led by the US Federal Reserve, there is a global trend to lower rates. Thirdly, with rates so close to becoming negative, the next move is that much more likely to be upwards just because of where rates stand at the moment (though the timing of that turning point is uncertain, and it is theoretically possible for rates to go lower if more cash is injected into the economy).
Mortgage providers won’t wait for the Bank of England to raise rates early this year, they will start to reprice their mortgages almost immediately. Expect to see the best fixed-rate deals disappear from the shelves over the next few weeks by more expensive replacements: now is the time to lock in your next rate.
It is easy to forget the Bank of England base rate has averaged more than 7% over the past fifty years and more than 4% in the past twenty years. Buyers and owners must be realistic that rates will go up at some point.
A £500,000 standard variable rate mortgage (2.5%+ base rate) on a £750,000 property currently requires a monthly payment of £1250 per month. If rates return to the 20 year average and increase by 3.5% the interest payments would jump to a whopping £2500 per month.
On one hand, mortgage rates increase in line with the BOE, but increasing BOE rates (generally) means the economy is improving. This in turn creates competition between lenders and more choice for the mortgage consumer.
For example, most mortgage products are presently 2.5% above BOE and the cost of moving to another lender is prohibitively high. Switching to a better rate may seem appealing until you look at arrangement fees of 3.5% making a change of product futile.
In a more competitive market, mortgage products 0.5% above BOE base rate would be more commonplace.
A third of mortgage borrowers will struggle to meet their repayments if interest rates rise, with those in the south-east most exposed to an increase in their monthly loan bills. If base rates rise to 3%, then that £150,000 mortgage will cost £250 a month more. Consumer spending, always cited as the motor of economic recovery, will inevitably stall.
Bank of England Governor Mark Carney predicts that new interest rates are likely to stabilise at or around 2.5%, a five-fold increase in the base rate for those currently holding a mortgage. Fixed-rate mortgages are at an all-time low, so it’s a good time to lock in the cheapest rates.
“Be aware of early repayment cost fees. If you’re thinking of moving before your mortgage term is up – look for a mortgage without these fees,” says Ray Boulger of John Charcol mortgage advisers.
If you’ve got an unusually large deposit of at least 35 per cent, Boulger advises that you have a “once-in-a-lifetime opportunity” to get a 10 year fixed-rate mortgage at a very low rate.
From across the pond, speaking two days before Donald Trump’s inauguration ceremony, Governor of the US Federal Reserve Janet Yellen said the US risked a “nasty surprise” if it waited too long to raise rates, adding that the Fed intends to increase rates three times this year and “a few times a year until 2019”.
Last year, the prevailing narrative was that a pledged $1trn (£800bn) of infrastructure spending would boost growth and inflation and so interest rates, which would be bearish for gold.
INTL FCStone analyst Edward Meir said, “We would view any short-term weakness as a buying opportunity in gold given that we do not think the Fed will be pushing the higher rate trajectory story so aggressively over the short-term.”
“The Fed would want to first wait and see what kind of fiscal policies Donald Trump formulates and sends to Congress.”
Like a Ponzi scheme, the British housing market has defied economic reality and flown ever higher on the current wave of credit and confidence. It will not survive a perfect storm of rising interest rates, stagnant wages, rising unemployment, higher taxation and lower demand from migration.
DMZ thinks regardless of whether you are an investor or a consumer, achieving the right mortgage product is extremely important. In the current market it is sensible to look for products without restrictive early repayment charges (unless of course you can get an excellent fixed rate). When rates do start to increase, it is good to have the flexibility to shop around for a better product.