If interest rates start rising should you be panicking?
As Standard Property reported a few weeks ago, interest rates are on the rise, but what are the implications? Essentially,
As Standard Property reported a few weeks ago, interest rates are on the rise, but what are the implications? Essentially, if you are a saver, hurray for you! But if you are a borrower — ie you have a hefty mortgage — the moment you may have been dreading looks like it’s arrived. Let’s take a closer look and see what Henley’s local agents have to say about it...
IT’S been the subject of debate between economists and industry experts since March 2009 when it dropped to a record low of 0.5 per cent, but Bank of England governor Mark Carney has finally announced the Bank Rate will rise as early as the start of 2016 — albeit at a slow and gradual rate.
A key moment for the UK economy, perhaps? It all points to an official end of “emergency monetary policy” — as far as those in power are concerned, the post-crisis era is finally over, almost a decade after US house prices started to drop in 2006.
But while it all looks like we’ll be getting back to normal, the “new normal” will be very different to the old one. The crisis is over, but the economy is not the place it used to be, requiring lower equilibrium rates.
But crucially, and potentially more scarily, millions of us have got used to a world with rock-bottom interest rates. There are whole generations of mortgage holders who cannot remember the housing crash of the late Eighties/early Nineties, when interest rates rocketed as the value of houses dropped through the floor.
One agent said: “In 1991 mortgage repossessions — people losing their homes — hit a record of 75,000. It was horrendous. Interest rates went from eight per cent to 13 per cent in six months. I remember, because I was a homeowner who had just increased his mortgage when interest rates doubled. The repayments were massive.”
The good news for the present generation is that base rates won’t be going up much for the time being — the governor expects them to peak at around 2.25 per cent, roughly half the 4.5 per cent 300-year average, implying a 1.75 per cent or so rise over two to three years.
These are base rates, of course â?? your mortgage lender will add their own cut on top. (To work out how much your mortgage could increase by, go to the Henley Standard’s mortgage calculator at: www.henleystandard.co.uk/Â property/mortgages.php)
All in all, this means borrowers will have less money to spend on other things — we will all feel the pinch.
This was a fact brought into focus by last week’s data from the Wealth & Assets survey published by the Office for National Statistics. Total household mortgage debt was estimated to be £1trillion in 2010-2012, up from £980 billion in 2008-2010. And total non-mortgage financial debt for households in Great Britain was estimated to be £104 billion in 2010-2012, up from £96billion in 2008-2010.
Some experts reckon the housing market will be hit badly, possibly stagnating nationally and dipping in London and the South East over the next couple of years. They also say that the young will be worse off in cashflow terms, though better off if they can buy slightly cheaper homes. Older generations will gain from increased interest payments but suffer a little from depressed asset prices.
So is it really time to panic? One agent reportedly said: “I suspect there are a lot of people heavily geared up on their mortgages right now, and it might be a little like watching the rats leaving the Mary Celesteâ?¦”
Naturally, Standard Property asked our local agents what they thought of it all...
ANTONY Gibson, assistant managing director of residential sales at Romans, Henley, said: “Unbelievably 26 years ago in 1989, when interest rates were at 13 per cent, the average first-time buyer was paying 98.3 per cent of their salary into their annual mortgage repayments and owner-occupiers were paying 72.8 per cent.
“Fast forward to last year and it’s a different story — first time buyers are paying just 24.5 per cent, and owner-occupiers 20.3 per cent. Figures like these demonstrate how much difference the interest rate can make, with a direct relation between the higher interest rates and the higher mortgage repayments seen specifically from 1988 to 1992.
“Nobody knows when the interest rate will change but we can’t ignore Carney’s news, especially as he said it could be increasing as early as 2016.”
Advisers at the Reading branch of Romans also had something to say on the subject: “Should we panic? Absolutely not. While it’s never wise to try and predict the future, fixed-rate mortgages will continue to remain at record lows, with data showing that almost 90 per cent of those buying and remortgaging are choosing to do so on fixed rates.
“But, despite the mortgage war continuing between lenders, rates are unlikely to fall any further than they already are.
“So why does the Bank Rate need to increase if everything is working? It all boils down to inflation. Despite it currently sitting at 0 per cent, the economy is improving and unemployment continues to sit at an extremely low level.
“If the economy continues to grow, it may begin to ‘overheat’. This is where demand outpaces productivity, which leads to suppliers hiking prices to reduce the demand. However, this may also lead to people paying more for things than they are actually worth.
“Who will the rise affect the most? Those currently on a variable tracker will potentially feel the change the most. For example, if you were paying off a £150,000 mortgage on a lender’s variable rate of two per cent. If the Bank Rate reaches 2.5 per cent as expected, monthly payments may increase by around £160 per month. However, if you took your mortgage out after April 2014, when the Mortgage Market Review [MMR] was introduced, your mortgage adviser will have stress-tested your financial situation to ensure that you could cope with such a rise, so there should be no need to worry if you haven’t had chance to assess your financial situation.”
In other words, you should be able to manage the increases in your monthly mortgage payments.
DAVID Tate, partner at Davis Tate, Henley, said: “Any rate rise follows an absolutely unprecedented period of nearly seven years of 0.5 per cent base rate. This has had the desired effect of promoting general economic growth, and has possibly lured some highly geared buyers into a false sense of security.
“However, last year’s MMR has ensured that the fact-find process with new borrowers is more stringent than ever, taking into account all household spending, including items such as eating out and gym membership, so these borrowers are borrowing in a more controlled environment.
“Unfortunately for first-time buyers, many local investors are choosing to invest in property, where returns can be four to six per cent, rather than keeping cash in the bank for a much lower return. The much-publicised lack of housing throughout the country, especially the South East, means that investors are competing with first-time buyers, thereby holding prices.”
PHILIP Booth, director at Philip Booth Esq, Henley, said: “For those homeowners that have bought a home during this period of low interest rates, the most sensible thing they can do is calculate the likely effect of interest rate rises on their repayments and consider how they will be affected by higher mortgage payments.
“Those with a high loan-to-value mortgage might even consider overpaying their mortgage now, if they can afford to, as many lenders allow up to 10 per cent extra on monthly repayments.
“This will reduce the amount of money they owe overall, and will also reduce mortgage repayments in the future.”