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Rising inflation – should I fix my mortgage rate?

As interest rates rise, should you reassess your mortgage?

THE recent decision to increase the Bank of England base rate was indeed forecasted in this column some months back, and its lack of logic remains the same. Quite how mortgage borrowers are driving inflation because of spending is beyond me, or perhaps that’s not what they are aiming at!

As inflation tops 3 per cent, it appears well beyond the 2 per cent target of the BoE.

However, it is well documented, that as a net importer rather than exporter, a weakened currency, driven by a Brexit fiasco has created a sharp rise in import costs, which creates inflation through higher prices.

This has nothing to do with the borrower, who is now caught between the rock of inflation on the goods they buy, and the hard stone of higher rates.

A rise in interest rates would normally have made sterling increase in value (and have pushed down these inflationary pressures above) but the seemingly ‘marketed’ statement from the BoE that any rate increases would be gradual curbed that. Currency wars indeed.

The impact will merely be psychological as more than half of borrowers are on fixed rate mortgages. Furthermore, this puts further pressure on the economy, as the householder factors in higher rates, along with inflation, but falling incomes.

With businesses unsure about Brexit, increased costs of their imports and the potential for higher borrowing rates, they will be unlikely to want to increase wages.

When the BoE changes rates, there isn’t necessarily always a direct reaction upwards or downwards in mortgage costs from lenders, although we have seen future fixed rates creep up over the last few months.

When rates nosedived to 0.5 per cent, mortgages stayed at over 4 per cent, and very gradually have returned to just over 2 per cent on average. Since 2009, it has always been a 1.75 per cent gap yet it was never more than a 1 per cent gap in the preceding years to the crisis! So there is room to move.

Since 2011, more than half of new borrowers have used fixed rates (over 84 per cent of new loans for last year), so there will be much less impact on borrowers via rate increases and in turn, the ability to slow inflation.

However, the biggest risk comes to approximately half of the 4.2 million borrowers whose fixed rates come up for review this year or next, who may be faced with a shock jump.

Right now, as you see, logic doesn’t seem to matter, so it’s worth borrowers looking to protect their own budgeting ability.

Mortgage rates are at a historical low and many borrowers will have no idea what a 7 per cent mortgage rate looks like let alone 15 per cent. Borrowers acclimatised to low rates could easily be caught out.

The Brexit and current government fiasco will only put further downward pressure on sterling, which increases inflationary risks, which in turn increase the potential for further rate rises.

I’ve clarified the best mortgage rates available today with our mortgage department, and a new borrower with a £180,000 mortgage will pay £702.26 per month for a two year fixed rate, £753.34 for a five year fixed rate but £706.43 for a variable/tracker rate.

Those who couldn’t deal with rising rates will see that one small rate rise will have their variable rate above the two- and five-year fixed rates, so if budgeting is important, you should seek out the advice of an independent mortgage broker. Needless to say, the difference between the best rates and worst rates is also considerable.

Trying to calculate what mortgage rates may do is a scientific gamble, but gambling with your ability to pay your mortgage and your home and security, needs careful consideration.

A downside of fixed rates however, is the early repayment penalties. If you decide to move or have to sell, having a hefty early repayment penalty is a difficult pill, so be sure your broker limits this. They will have every mortgage rate at their finger tips and will be able to guide you through that minefield.

Source: Irish News

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House prices aren’t the issue – land prices are

While reporting on the recent court case where controversial landlord Fergus Wilson defended (but lost) his right to refuse to let to Indians and Pakistanis, I learned something about how he’s now making money. He is now far from being Britain’s biggest buy-to-let landlord. He’s down to 350 homes, from a peak of 1,000. And what’s he doing with the cash made from sales? Buying agricultural land close to Kent’s biggest towns. One plot he bought for £45,000 is now worth, he boasted, £3m with development permission. And therein lies the reason why we have a housing crisis.

As long ago as 1909, Winston Churchill, then promoting Lloyd George’s “people’s budget” and its controversial measures to tax land, told an audience in Edinburgh that the landowner “sits still and does nothing” while reaping vast gains from land improvements by the municipality, such as roads, railways, power from generators and water from reservoirs far away. “Every one of those improvements is effected by the labour and the cost of other people … To not one of those improvements does the land monopolist contribute, and yet by every one of them the value of his land is sensibly enhanced … he contributes nothing even to the process from which his own enrichment is derived.”

When Britain’s post-war housebuilding boom began, it was based on cheap land. As a timely new book, The Land Question by Daniel Bentley of thinktank Civitas, sets out, the 1947 Town and Country Planning Act under Clement Attlee’s government allowed local authorities to acquire land for development at “existing use value”. There was no premium because it was earmarked for development. The New Towns Act 1946 was similar, giving public corporation powers to compulsorily purchase land at current-use value. The unserviced land cost component for homes in Harlow and Milton Keynes was just 1% of housing costs at the time. Today, the price of land can easily be half the cost of buying a home: £439,999 is the cost of land with planning permission for one terraced home in a less salubrious part of London such as Peckham.

What happened? Landowners rebelled and Harold Macmillan’s Conservative government introduced the 1961 Land Compensation Act. Henceforth, landowners were to be paid the value of the land, including any “hope value”, when developed. Today a hectare of land is worth 100 times more when used for housing rather than farming. Yet when a bureaucratic pen grants permission, all the value goes to the landowner, not the public. Bentley says landowners pocketed £9bn in profit from land they sold for new housing in 2014-15. For each new home built that year, £60,000 went as profit to the landowner. Major infrastructure projects such as Crossrail 2 and the Bakerloo tube line extension are estimated to cost the public purse £36bn. Landowners, meanwhile, will pocket £87bn from increased land values nearby.

In the Netherlands, the only sizeable country in Europe more densely populated than England, the Expropriation Act allows local authorities to buy land at current-use value. They prepare it for development, use part for social housing and sell the rest for commercial use, often at a large profit.

Think of it. Councils take all the financial uplift from planning permission, using potentially huge profits from land sales to build social housing almost at no cost to the public purse. Developers focus on making profits from building high-quality homes, not from hoarding plots. Land speculation is killed off almost overnight.

Instead, the chancellor will tell us in this week’s budget that the solution is billions more for help to buy. All that does is raise property prices and landowner profits. If only Philip Hammond could be more like Churchill.

Source: The Guardian

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Nationwide cautious after mortgage slowdown drags on profits

Nationwide cautioned investors about rocky trading conditions in the UK mortgage market, as decreased one-off gains from its home loan division led to a 10% decline in profits for the six months ending on 30 September.

The largest building society in Britain said that although demand for mortgages in the half had been “strong”, fears that intensifying competition in the mortgage market could impact the group’s lending activity led it to reaffirm its somewhat cautious forecasts for its full-year results.

The lender also warned that the slow rate of growth in the economy as a whole looked likely to carry over into the housing market.

However, it noted that after uncertainties relating to the UK’s departure from the European Union had calmed down, both would likely begin to pick up the pace.

Nationwide’s chief executive Joe Garner said, “Competition in the mortgage market remains intense, and shows no sign of abating. Although mortgage volumes remain strong, we’re prepared for the possibility that intense competition combined with declining consumer confidence may lead to a moderation in gross lending and market share in the second half of the year.”

Although Nationwide reported a 4.5% increase in its net interest income, thanks to lower funding costs, the firm watched its mortgage margins contract, expecting that they would continue to do so as the year progressed.

“Competition in retail lending markets remains intense and has resulted in more borrowers switching to competitively priced products,” it said. “Consequently we expect our reported margin to trend lower during the second half of the year and into 2018/19.”

Overall, pre-tax profits fell to £628m from the £696m it posted at the same time a year earlier and although deposit balances rose £1.8bn in the half, that figure was markedly less than the £4.7bn added to Nationwide balances in 2016.

Garner said there were “signs of a squeeze on household finances from low wage growth and above-target inflation.”

“Our member panel tells us people are beginning to cut back, particularly on savings and discretionary expenditure, which is not surprising when real incomes are falling,” he added.

Source: Digital Look

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Theresa May hints at new government policies to build “more houses, more quickly”

The Prime Minister has committed to building “more houses, more quickly” as the government comes under further pressure on the growing housing crisis.

The government will announce measures to “fix the broken housing market” in “the coming weeks and months”, Theresa May said.

The Prime Minister was speaking ahead of new housing supply figures, which are due out tomorrow morning.

Most recent figures, for 2015-16, showed an 11 per cent year-on-year increase in the total number of net additional dwellings to 189,650 – but the total was still down 15 per cent on the 2007-2008 peak.

May said: “For decades we simply have not been building enough homes, nor have we been building them quickly enough, and we have seen prices rise. The number of new homes being delivered each year has been increasing since 2010, but there is more we can do.

“We must get back into the business of building the good quality new homes for people who need them most.”

May was speaking ahead of an announcement given today in Bristol by communities secretary Sajid Javid to wipe housing associations’ debt off the balance sheet.

Javid will say: “There are many, many faults in our housing market, dating back many, many years. If you only fix one you’ll make some progress, but not enough. This is a big problem and we have to think big.”

Last month the minister called on his cabinet colleague Philip Hammond to consider borrowing billions at current low interest rates to boost house building. However City A.M. understands the chancellor is cool on the measure – or indeed anything particularly radical – being included in next week’s Budget.

Source: City A.M.

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Steady UK inflation leaves question mark over BoE rate action

LONDON (Reuters) – British inflation unexpectedly held steady in October, wrong-footing the Bank of England and raising fresh questions about how fast the central bank will follow up on this month’s interest rate hike.

The annual rate of consumer price inflation was unchanged from September’s five-and-a-half-year high of 3.0 percent, official data showed.

When the Bank raised rates for the first time in a decade in early November, it said it expected inflation would hit 3.2 percent in October before starting to fall slowly towards its 2 percent target.

“Red faces all round as UK inflation fails to rise as widely expected, not least by the Bank of England,” said Chris Williamson, chief business economist at financial data company IHS Markit.

Sterling fell against the dollar and British government bond prices rose as markets lengthened the odds slightly on a new BoE rate hike in the foreseeable future.

Most economists polled by Reuters after the Nov. 2 rate rise said they did not expect the Bank to raise rates again until 2019. On Tuesday financial markets – which tend to take a more hawkish view – priced in no increase until late 2018. BOEWATCH

While inflation in many developed countries remains weak, in Britain it has surged from just 0.5 percent at the time of the June 2016 vote to leave the European Union as the fall in the pound pushed up the cost of imported goods.

October’s data showed that lower fuel price inflation was offset by the biggest rise in food prices since September 2013.

Many economists have said this month’s rate rise was unnecessary because of the slowing domestic economy, weak productivity and wage growth, and uncertainty about Britain’s future trade relationship with the EU.

Economists polled by Reuters expect wage data due on Wednesday to show pay growth stuck at just over 2 percent.

DATA DILEMMA

The Bank argues that leaving the EU will damage Britain’s ability to grow as fast as before without generating excess inflation, and that the lowest unemployment rate since 1975 makes labour shortages and a rebound in wage growth a risk.

This month’s rate rise was not aimed at directly curbing the recent surge in inflation but at ensuring above-target inflation does not become too entrenched in Britain, especially as the United States and euro zone begin to tighten monetary policy which could further weaken the pound.

The Bank has said it still expects inflation to be slightly above target in three years’ time. On Tuesday Carney reiterated that he was allowing inflation longer than normal to return to target due to the Brexit uncertainties.

Paul Diggle, a senior economist at Aberdeen Asset Management, said inflation would pick up again due to rising oil prices and residual effects of the weaker pound.

“The Bank of England is stuck between a rock and a hard place. On balance, we think (it) will have to hike interest rates at least once more next year.”

Retail price inflation, a measure used to calculate payments on government bonds and many commercial contracts, hit a near six-year high of 4.0 percent, bad news for Hammond who is due to announce a budget plan on Nov. 22.

But other data showed that underlying price pressures are easing. Costs of manufacturers’ raw materials rose at their slowest pace since July 2016, a month after the Brexit vote.

“Our baseline case is that CPI inflation has now topped out,” Investec economist Philip Shaw said.

Source: UK Reuters

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Distiller secures finance to acquire historic Rosebank site

IAN MACLEOD Distillers has secured a funding deal worth £80 million, revealing that the finance will be used to underpin its recently-announced acquisition of Falkirk’s historic Rosebank Distillery.

The Broxburn-based distiller, which owns the Glengoyne and Tamdhu single malts, said it will also use the loan package to drive its organic growth ambitions.

The asset finance facility, which has been jointly provided by Bank of Scotland and PNC Business Credit, is secured against the distiller’s whisky stocks. Its most recent accounts show that the value of stock held by the firm stood at £76.5m at September 30, up 14 per cent on the year prior.

As part of its new funding deal Bank of Scotland will provide Ian Macleod, which acquired Edinburgh Gin last year, with day to day banking services, including a £250,000 overdraft facility.

It comes shortly after the distiller announced that it is set to restore production at Rosebank Distillery, which has been silent since 1993.

Ian Macleod has agreed a deal to acquire the stock and trademark from Diageo, while securing a separate agreement to purchase the site from Scottish Canals, subject to planning consent. Rosebank Distillery sits on the banks of the Forth & Clyde Canal.

Mike Younger, finance director at Ian Macleod Distillers, said: “Bringing the iconic Rosebank distillery back to life is a big project, and one that we’re incredibly excited about.

“We are very pleased that we now have a funding package which allows us to both rebuild Rosebank and fund the general expansion of the business.

“Asset based lending is ideal for us, as it provides highly flexible funds secured against our appreciating maturing whisky stocks.”

Source: Herald Scotland

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Outlook for UK pay growth improves, but only a little – CIPD

LONDON (Reuters) – British employers expect to raise pay for their workers only a little despite strong demand for staff and already low unemployment, according to an industry survey that suggested no immediate respite for the country’s squeezed households.

The Chartered Institute for Personnel and Development said its gauge of pay intentions for the private and public sector rose 2 percent in the latest quarter from 1 percent previously.

CIPD said planned pay rises in the private sector were clustering around 2 percent, the median for the last five years.

Last week the Bank of England raised interest rates for the first time since 2007 and predicted wage growth will pick up next year to 3 percent, up from a range of 1.8 to 2.2 percent seen in recent months.

But CIPD said 38 percent of private sector firms faced no pressure at all to raise wages for the majority of their workforce, compared with only 24 percent that said they did.

The squeeze on household incomes from high inflation and weak wage growth was a big factor behind the slowdown in Britain’s economy in the first half of 2017.

A separate survey from payments company Visa on Monday showed British shoppers reined in their spending by the most in more than four years in October.

“Over time we might expect low unemployment levels to lead to increased pressure on pay, as the Bank of England has predicted,” Gerwyn Davies, CIPD senior labour market analyst, said.

“However, it’s the UK’s ongoing poor productivity growth that’s currently preventing employers from paying more, not their inability to find or retain staff.”

Last month, Britain’s official budget watchdog said it expects to “significantly” downgrade its forecasts for productivity growth in the next five years, something that could hurt the government’s finances.

There was better news for public sector workers. CIPD said 59 percent of public sector employers reported pressure to hike salaries for most staff, most of whom are subject to a long-standing pay cap for state workers that may soon be ditched.

Prime Minister Theresa May has eased seven years of public sector pay caps modestly and for police and prison guards.

Finance minister Philip Hammond is under pressure to relax pay constraints further in his annual budget on Nov. 22.

CIPD said its gauge of employment demand eased only slightly from the previous quarter and remained near record high levels.

Official labour market data due on Wednesday is expected to show the unemployment rate will stay at a four-decade low of 4.3 percent, but with no improvement in wage growth, according to a Reuters poll of economists.

CIPD’s survey was based on 2,007 employers and was conducted between Sept. 11 and Oct. 3.

Source: UK Reuters

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UK house prices flatline across North-South divide

Historically when we talk about a North-South divide in the UK housing market it tends to be house prices in the South going up and prices in the North trailing in relative and often real terms. The situation would seem to be changing according to surveyors across the UK, having seen increased sales in Scotland, North-East of England and Wales while the rest of the UK flatlines or dips. This will surprise many people but when you take a step back and look at the situation from a distance perhaps those years of outperformance in the South of England are catching up?

RELATIVE VALUES

We know that the cheaper properties in the UK tend to be towards the North of England and Scotland with Wales also showing some pockets of value. During the month of October a poll amongst UK surveyors showed that 20% more surveyors have seen a fall in new buyer enquiries than an increase. The same number of surveyors also saw a decline in transaction numbers right across the UK but again there was a very distinctive North-South divide.

Historically, although not right across the board, the North of England has tended to offer limited capital appreciation but very attractive rental yields for the buy to let market. The South of England housing market seems to depend more upon capital appreciation than it does rental yield when calculating overall returns. There are obvious pockets in the North, South and Midlands, not to mention Scotland, Northern Ireland and Wales which go against this trend but the split is there.

LONDON HOUSE PRICES

As we have mentioned on numerous occasions it is perhaps best to look at the London housing market as a market in its own. It often bears little or no resemblance to the overall UK market and the same can be said at the moment. The same survey showed that two thirds of surveyors reported a drop in the price of London houses during the month of October. This is the lowest figure we have seen since 2009 which was in the midst of the financial crisis.

Economic uncertainty and concerns that the Conservative government is on the brink of collapse tend to impact London house prices more than anywhere else in the UK. The London financial markets and business arena need a strong government, one in total control of its decisions and it is fair to say that Theresa May is more of a zombie than a strong leader. Many believe it is only a matter of time before the government collapses with Jeremy Corbyn waiting on the sidelines to take advantage.

NO PRE-CHRISTMAS FLURRY

It is interesting to see that many estate agents are reporting a significant lack of interest in the moving before the housing market effectively closes down for Christmas. September and October are traditionally relatively active months with buyers and sellers hoping to tie up deals before the New Year. Even though the recent base rate increase was relatively small at just 0.25% it is indicative of the short to medium term outlook for interest rates. While they are not expected to rise sharply they have turned a corner and the 0.25% increase was passed on in full by many mortgage providers.

Economic uncertainty, a government on the brink, troubles with Brexit, an increase in interest rates and seemingly ever rising moving costs have all come together to form the perfect storm for the UK housing market. Time to batten down the hatches and wait for house prices to recover!

Source: Property Forum

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House prices fall in four UK regions

House prices fell in four areas of the country in October, surveyors report.

The Royal Institution of Chartered Surveyors found that house prices are falling in London, the South East, East Anglia and the North East.

What is more in the next three months surveyors expect prices to decline nationally.

Simon Rubinsohn, RICS chief economist, said: “The combination of the increased cost of moving, a lack of fresh stock coming to the market, uncertainly over the political climate and now an interest rate hike appears to be taking its toll on activity in the housing market.

“With both buyer enquiries slipping and sales expectations also subdued, the sense is that home owners are staying put and first time purchasers are increasingly focusing on that part of the market supported by the Help to Buy incentive.

“A stagnant second-hand market is bad news for the wider economy, not just in terms of spending but also because it restricts mobility.

“Prices do now seem under pressure at the more expensive end of the market with a further rise in the number of properties transacting at below the asking price.

“But it is important to not characterise the whole of the market by what is happening in parts of London and the wider South-East.”

Stephen Wasserman, managing director at West One Loans, played down the report however.

He said “Today’s RICS figures showing subdued activity are disappointing; however, industry analysis over the past few months has painted a confused picture of the property market, so it is important not to get carried away and assume this flat-lining is a downward trend.

“Political and economic turmoil, alongside the competitive environment and supply vs demand issue, have all contributed to wider market uncertainty in recent months, and this has undoubtedly hindered buyer and investor demand.

“While it may take time for the sector to reach its full potential, the market has shown its underlying resilience before, and we are cautiously optimistic that the market will pick up in due course – especially if the rumoured stamp duty changes for first-time buyers are a topic in this month’s Budget.”

Source: BT.com

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Home owners in UK rushed to remortgage ahead of expected rate raise, new data shows

Some 88% of remortgage applications were successful in the third quarter of 2017 in the UK, up 8% year on year and the highest proportion in the last two years, the latest figures reveal.

Lenders and brokers both report there was an increase in demand for five year fixed mortgages which should come as no surprise as an increase in interest rates which came earlier this month had been widely expected.

The data from the Intermediary Mortgage Lenders Association (IMLA) confirms that home owners planned to take advantage of ultra-low rates and protect themselves against future rate rises.

Overall a positive picture for the mortgage market emerges from the IMLA’s quarterly report with total mortgage applications that led to offers increasing by 13% year on year

Some 76% of brokers reported an increase in demand for five year fixed rates during the first six months of the year, with 23% stating that demand had increased substantially while 69% said demand had increased, with 16% noticing a substantial increase.

The positive outlook is reflected across all segments of the mortgage market, as buy to let, first time buyers and home mover and specialist lending segments also showed signs of strength, as the percentage of offers to completions increased across the board.

‘After a decade of record low interest rates, the timing of a possible rise was widely debated before November’s decision, both within the Bank of England and in the mortgage market, and this was clearly resonated in homes across the UK too,’ said Peter Williams, Executive Director of IMLA.

‘As a rise became more of a certainty, significant numbers of home owners have rushed to secure fixed rate mortgages priced to a 0.25% Bank rate for the next two, three, five or even 10 years,’ he pointed out.

He also explained that while customers who remain on tracker and standard variable rates are now adjusting to the first increase in monthly loan repayments in the last 10 years, unwavering borrower demand and lender supply should maintain competitive residential loan to value (LTV) mortgage pricing in what is now a rate rise environment.

‘Despite uncertainty in the wider economy, our data also shows the intermediary channel continuing its recent success in matching consumers with suitable products, helped by strong competition and appetite to lend within the boundaries of careful affordability rules,’ he added.

Source: Property Wire