News Review: Specialist Prime
Coping classes gambling on interest rates by Charles
Haresnape, managing director, Aldermore Residential Mortgages
With continuing turmoil in the eurozone and uncertainty over the future of the economy, it’s not a surprise that the Bank of england has decided to sit tight and leave interest rates exactly where they are. it is good news for
borrowers. those on standard variable rate deals are enjoying some of the lowest rates in living memory and for those who prefer the certainly offered by fixed rates, there are some cracking deals to be had. the sixty-four million
dollar question, of course, is how much longer will rates stay at these historically low levels? the truthful answer is that nobody knows. it looks as if the economic woes of greece are only going to get worse before they get better and it’s also increasingly probable that debt contagion will spread to countries such as italy and Spain in due course. the implications for other eurozone countries of this happening are dire, which is why german chancellor angela merkel has been working hard to try and find a resolution to the problem. She’s well aware that if greece goes into meltdown, it’s german banks that will be left counting the cost of the crisis. the problem is that the
fallout won’t be restricted to mainland european
countries. europe is Britain’s most important trading partner and if the european economy goes under, it will drag the uK down with it.
Firefighting What’s all this got to do with interest rates? Well, the Bank of england is very concerned about the state of the economy and is trying everything within its power - including committing a further £75bn to quantitative easing - to avoid it slipping back into recession. However, the signs are not encouraging; unemployment has risen to 2.57m which is a 17-year high and the economy grew by just 0.1% between april and June. in other words, it ground to a halt.
Household consumption
has also fallen by 0.8% during the second quarter and consumer confidence remains low. the Bank of england does not want to do anything that may derail a recovery - which includes moving interest rates. at the moment stimulating recovery is taking a higher priority than reducing inflation, which shows just how concerned the central bank is about the situation. all of this means that the prospect of an interest rate rise looks an awfully long way off (in the short-term, there is probably as much chance of a rate cut as there is a rate hike). there is nothing to indicate that a rate rise is on the books and some forecaster are saying that it could be 2014 before we see an upward movement in rates once again.
26 mortgage introducer NOVEMBER 2011
Borrower action For those on standard variable rates the immediate outlook looks good. the temptation is to hang-on in there and enjoy low rates while they last. the problem, of course, is that most people are not terribly good at predicting when the market is going to change and when rates will rise once again. History tells us that rate rises often take people (which includes the so-called experts) by surprise. an added complication is
that fixed rate swap rates are influenced by the market’s expectation of what’s likely to happen to rates in the future and if the belief is that rates will rise, swap rates will start to creep upwards. the net effect is that fixed rate mortgage deals often become more expensive ahead of an increase in Bank Base rate.
Stick or fix So, should homeowners stick or fix? if they’re feeling financially flush and can easily absorb a half percent or one percent interest rate rise, then a strategy of sitting-tight makes sense. However, for those on a limited budget or concerned about the future cost of food and fuel, then
now may be a good time to lock-in to one of the highly competitive fixed rate deals currently on offer (the average 2-year fixed rate is now at a record low of just 3.82% and some of the very best deals are below 2%). Visiting a mortgage adviser to discuss options therefore makes a lot of sense.
Coping classes and it’s not just first-time buyers and those on lower incomes who may value the security of fixed rates. research shows that it’s the coping classes typically earning between £25,000 and £50,000 who have been hardest hit by public sector spending cuts, wage freezes and rising living costs. a study by the resolution Foundation suggests that working couples with children will be £4,250 worse off this year. incomes are therefore under pressure right across the social spectrum and affordability in the future, as and when rates do rise, is an issue which brokers need to consider very carefully for all their clients. calling the market is a notoriously difficult thing to get right. if it were easy, we would all be millionaires.
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