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