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BoE’s base rate rise is driving mortgage pricing

Mortgage pricing is continually shifting and that is likely to be even more frequent in the wake of an increase in the Bank of England base rate.

As lenders announce their position on the standard variable rate, which has tended to mirror the rate rise in most cases, the rest of the portfolio can also be subject to changes.

However, that may not necessarily be in the direction that borrowers might expect.

As we head toward the final quarter, lender attention is on maintaining a strong position in what is an extremely competitive market. As a result, many lenders have actually been making rates sharper where possible. The other week, Coventry Building Society improved some of its medium to longer term fixed-rate options, namely its five and 10-year products.

These were already well priced, so even shaving a small amount off the range means that some are right up with the very best. For example, its five-year rates start from 1.89 per cent, and its lowest 10-year fix is now 2.35 per cent – a market leading rate.

These benchmark rates are admittedly limited to 50 per cent loan-to-value, but deals edging up the LTV scale are still very favourably priced versus the competition.

The incentives that have become an expectation of any Coventry deal are available, providing free valuation and free basic legal work for remortgage borrowers. We have seen steady growth in the popularity of five-year fixed rates as borrowers look to take advantage of the low rates on offer, not only making a monthly cost saving in many cases but also protecting against future rate rises.

However, 10-year fixes remain something of a niche area despite the exceptionally low rates on offer. Many of the concerns can be put down to understandable anxiety around locking in for so long and the impact that can have on flexibility in the future. Many long-term fixed rates will carry high early repayment charges and although generally portable to another property that doesn’t give guarantees.

Coventry clearly understands that this can be a key challenge for borrowers and has built in an added benefit in some of its fixed rates.

Low LTV 10-year fixed rates not only offer very competitive rates and the usual incentive package but only tie borrowers in for the first five years of the deal. That matches the kind of lock-in that many borrowers are happy to consider but leaves them with longer term security that they can reassess if necessary without incurring a penalty. It is a very solid option for those borrowers prepared to step up to a slightly higher interest rate to lock in for the longer term.

Source: FT Adviser

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Bank of England: base rate could stay under 2% for 30 years

The Bank of England (BoE) has admitted that current forecasts show its base rate could remain under 2% for the next 30 years.

Last year BoE governor Mark Carney suggested the Bank was keen to return the base rate to a more normal level with a series of steady rises.

However, after rejecting a previously expected increase in May, it appears forecasts for the much longer-term now suggest there will be little chance of a return to pre-crisis norms of around 5%.

Speaking at the Cumbria Chambers of Commerce, BoE deputy governor, financial stability, Sir Jon Cunliffe said base rate could in fact remain below 2% for decades.

Levelling off under 2%

Explaining why the Bank had been reluctant to aggressively increase base rate, he noted there were good economic arguments for taking a more proactive approach to lifting base rates, including that monetary policymakers will have insufficient ammunition to stimulate demand in future downturns.

He said: “One cannot help acknowledging this concern. If, as seems likely, we are and will continue to be in a lower natural interest rate environment, policy rates will not approach levels seen before the financial crisis. The average level of bank rate was around 5% for the 20 years preceding the crisis.

“The current yield curve sees bank rate rising slowly over three years and levelling off at under 2% for the next 30 years.

“The average policy loosening cycle in the UK was around 2% over the pre-crisis period. If that remained the case, we would clearly have less room for manoeuvre in the face of a sharp downturn, particularly if that happened in the near future.”

Brexit creating business uncertainty

Sir Jon also acknowledged that Brexit was already affecting the UK economy and the result of uncertainty was now playing a far greater role.

First the depreciation of sterling following the referendum generated inflation which squeezed real incomes and led to the drop in consumption and activity in the UK at the end of 2016.

In contrast, this also generated export growth that has helped to support the economy.

“More recently, there are signs that Brexit uncertainty is holding back investment,” he said.

“These impacts are incorporated into the MPC’s assessment of policy and forecast of the economy.

“But it is much harder – and in my view it would be mistaken – to set policy in anticipation of any particular Brexit outcome,” he added.

Source: Your Money

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Consumers and retailers should expect a rocky year ahead, believe experts

Consumers have remained resolutely confident over a year of significant political and economic upheaval but it has been a different story for retailers and experts fear there are rockier times ahead.

Retailers have done their best to absorb wholesale price increases and warned for months that they were at the limit of their capacity before inflation began to bite household finances as the year drew to a close.

Even Black Friday offers failed to spur a spending frenzy among squeezed consumers.

Britons have been suffering the knock-on effects of the Brexit-hit pound, which has made imports more expensive and lifted shelf prices across the country.

Uncertainty over Brexit and the wider economy, the first Bank of England base rate rise in over a decade and stretched affordability as rising living costs bite have all contributed to a mood of caution.

BRC chief executive Helen Dickinson said: “With current conditions likely to persist into next year, the Government needs to do all it can to support the UK’s consumers, not least by securing a fair Brexit for them in the forthcoming trade negotiations.”

Richard Hyman, who has analysed the retail sector for more than 30 years, raised doubt over consumer confidence, telling the Press Association: “If I read that consumer confidence is pretty good, I don’t believe it.

“Why would it be? It started off paper thin and it’s got progressively worse.

“There’s massive uncertainty. You’ve got inflation coming through, you’ve got earnings lagging to where they were years ago. This makes life difficult. Why would people be optimistic.

“It’s been a tough year. Uncertainty has been the main problem.”

Looking ahead to 2018, Mr Hyman said he predicted “more of the same”, adding: “How long is it going to be before we’re told what Brexit is going to look like?

“In retail it’s going to be a really defining year and I think we will see quite a lot of casualties.”

Lisa Hooker, consumer markets leader at PwC, noted the “continued resilience of consumer sentiment” but said that looking further ahead, UK consumers remained cautious about big ticket spending.

She said: “We predict that furniture and electronics will be one of the first casualties of consumers tightening their belts, although we won’t see the impact of this on the high street until the first quarter of 2018, which is traditionally the time of year that people think about big purchases for their homes.”

Joe Staton, head of market dynamics at GfK, whose consumer confidence index just marked almost two years without a lift into positive figures, said: “It has been a slipping and sliding year.

“We need to see several issues move on before the downward trend of the consumer mood changes. We need to have a better sense of how Brexit will pan out and also of how quickly and how far interest rates will rise.

“None of this will be resolved quickly, so there’s every likelihood that 2018 will take us lower.”

Source: Yahoo Finance UK