"Even if you believe that such a move will have little impact on the mortgage market and existing borrowers, at least it sends a message that rates can go up, as well as down."
The much-anticipated increase in Bank Base Rate earlier this month might have set the hounds running in terms of an anticipated return to ‘normality’ when it comes to interest rates but it was interesting to hear Governor Mark Carney also talking about the need for just two further increases in rates over the next few years, rather than anything more regular.
Indeed, one got the sense that the MPC were partly acting now, not just because of the economic and, rather important, inflationary data that was released but also because it feared ‘crying wolf’ again when every man, woman, child and dog was expecting the 25bps rise.
Which of course didn’t stop two members of the MPC voting against this option, but one wonders how Carney himself would have reacted were there a few other dissenting voices – again I suspect that he would have felt compelled to increase rates regardless.
Despite all the fuss about the first increase in rates in 10 years, it should not be forgotten that BBR is only back at 0.5% - a position it resided at for many years prior to last August’s decision to cut rates back to 0.25%. One might question if the MPC would have acted this month if BBR was already at 0.5% - I very much doubt it.
Some have suggested last year’s decision to drop rates was over-egging the pudding post-EU referendum vote, however devoid of political leadership I think Carney and the MPC members had little choice but to act and generate a degree of stability and deliver a reassurance that the UK economy wasn’t going to go to hell in a hand basket because of the vote.
Whatever your view with hindsight, at the time it was a decisive decision and (lest we forget) gave a degree of clarity that was sorely lacking. The performance of the economy since then has perhaps shown that such action might not needed to have been taken, but at the time the pound was falling rapidly and there was real uncertainty about what might come next.
Back to BBR and we are now back to 0.5%, and even if you believe that such a move will have little impact on the mortgage market and existing borrowers, at least it sends a message that rates can go up, as well as down. A situation that some borrowers would never have found themselves in before.
My own view is that for relatively new borrowers – and potential first-time purchasers – this is an important message to send out. It is of course difficult to get on the housing ladder – and let’s be honest, there can be little correlation between BBR and the rates available to first-timers – but those who are slightly longer in the mortgage tooth will know that rates might be historically low now but this won’t last, and even a small increase such as this signals we are on the first step back to a more ‘normal’ levels.
The good news however – if you’re a borrower and not reliant on income from savings rates – is that ‘normal’ is very different now to what it was 10 years ago. Even if those two BBR increases predicted by Carney are 50bps rather than 25, then we are still ‘only’ up to 1.5% - a level far below the ‘normal’ rates we have seen over the past couple of decades. The link between mortgage product rates and BBR might not be overly strong but competitive pressures should mean that lenders – at least in some LTV bands – are able to keep pricing relatively low so long as the borrower can meet the more stringent affordability and criteria measures.
But, what of the situation for first-timers, especially those who only have small deposits? Well, I suspect there will be little change – Government measures to help more people onto the housing ladder will be welcomed of course but when it comes to the rates and the mortgages on offer, it seems obvious that high LTV borrowers will still be perceived as much riskier than their lower LTV counterparts, and they can therefore expect to pay much more for their loans.
That being the case, the rise in BBR should have little impact for these borrowers. What it might however do is solidify the situation for those who want to purchase but are currently only able to save small deposits to do so. Our recent LTV Tracker showed that product choice for average first-timers buying averagely-priced properties is pretty slim, and this looks unlikely to change for the foreseeable future – only a fall in remortgage business and a need to look elsewhere for new business might see more lenders approaching the first-time buyer sector. Until then, the market looks likely to remain a difficult place.
