In recent weeks we have added to our systems the lowest two, three and five-year fixed rates since 1989.These rates seem to be having the right impact in terms of pushing demand too, at least in the digital world. In January 2013 we saw more mortgage related traffic, more mortgage searches and more online enquiries passed to our brokers and aggregator partners than in any month of 2012.
However, with around 70% of UK homeowners still on a variable rate deal, the public, conditioned in recent years to expect ever lower interest rates, could be drifting toward a ticking time bomb that neither they, nor the majority of market participants can see coming. Brokers and aggregators must take the opportunity increase the awareness of today’s exceptionally low rates to give todays homeowners the best possible chance of withstanding financial challenges yet to come.
Market commentators largely remain convinced that low interest rates are here to stay for the foreseeable future, with the BoE’s quantitative easing policy likely to continue indefinitely (coupled with negative real interest rates), enabling the UK to service its growing debt at lower, more manageable nominal rates.
However, the UK’s bond market has benefitted from a flight to safety during the credit crisis, or at least, a flight to the ‘best of a bad bunch’. Now however, as ratings agencies and market participants start to look in more depth at the UK’s economic predicament the sustainability of that approach is being called into question. Whilst the downgrade of UK debt by Moody’s last Friday was largely symbolic, the precipitous fall of sterling this year (Down 7% versus the Dollar) should be of far greater concern to an economy that is a net importer and has external debts as high as 400% of GDP.
A further significant or rapid decline in sterling would not only be destabilising for the economy; it is likely that, in order to prevent a mass exodus from Gilts, rates will have to rise in bond markets to compensate holders of gilts for an inflationary tax and real capital loss.
In this scenario it won’t be the Bank of England forcing up interest rates that impacts the mortgage market, it will be stress in the UK Banks Funding markets forcing increases in Standard Variable Rates, and lending rates across the board.
We’ve already seen in 2012 how quickly Lenders can change their SVR rates depending on conditions in the funding markets. Santander announced it was raising its SVR for an estimated 300,000 borrowers in mid-August 2012, whilst Halifax announced it was bumping its SVR from 3.5 per cent to 3.99 per cent in the Spring. Even as recently as yesterday, we saw the Bank of Ireland and its subsidiary, Bristol and West, invoke a special condition clause to increase Tracker rates across the board, impacting 13,500 residential and buy to let customers. The Bank blamed a ‘significant increase in the cost of funding these mortgages since 2008, and the need for banks to maintain greater levels of capital’.
The impact of rate rises on the disposable income of the 70% of the population on variable rate mortgages would be significant. According to the surveys analysed by the Bank of England in 2012, a 2% increase in the interest rate could see more than 50% of UK households on variable rate mortgages needing to adjust their mortgage, work longer or cut spending. Once the increase rises to 4%, that figure would mean virtually every single homeowner with a variable rate mortgage having to significantly adjust their spending habits.
With more than 80% of consumers researching their next mortgage online, brokers and aggregators are ideally placed to not only highlight to consumers the exceptional rates available in the market today, but also to educate them about the risks of putting off re-mortgaging ‘just in case’ rates drop further still. One day, perhaps not far from now, it really could be too late.
