Rates are rising for sure, and with the Bank of England’s announcement that the base rate will now rise by 0.5 percentage points to 2.25%, the highest level since 2008, homeowners and investors alike will really be counting the pennies.
Last week I was interestingly asked about an onward index swap (OIS) curve and what that meant for interest rates! Whoop.
As you can see, it’s a very specific and clever question, but what does that actually mean, and is it relevant in determining rates/inflation and in turn the value of your home? Remember, the UK’s is a debt-driven economy, and the comfort of having equity (a gap between your home’s value and debt/mortgage) is the big confidence driver for the economy. In reality it should mean nothing other than: “You have X amount of debt”.
The OIS is a ‘forecast’ of where interest rates may be at some point in the future so, looking at that curve for the coming years, it’s clearly downward. The graph is hefty in its spike upwards now, topping at around 4.5% but nosediving over the coming years and levelling out in five to six years’ time at around 2.8%.
Do I give this much credence? Hardly. It’s like predicting the weather in two years by sticking a wet finger out of your car window now. For example, the same (one month-old) predictive curve on the date of the August 22 monetary policy committee meeting showed rates peaking at close to the new low of 2.8%, and falling to a low of 1.8%. That’s quite a gap within a month (see note above re. wet finger).
I stand by the assertion that many of the inflationary pressures are temporary and have a cause, which can be remedied with the right appetite and approach. This does not help a homeowner or borrower, however. This effectively becomes a gamble, and the odds are the loss of a house and security or, at best, having to sell it down in a market where the buyer is the winner. History doesn’t repeat itself, but it often rhymes.
It’s better to plan and calculate than take a risk so, as I stated over the past two years, grabbing a slightly longer fixed rate would have been a good move so you know what you are budgeting for.
The Financial Conduct Authority states it expects base rates to average at 3%, ranging from 2.5% to 4%, and that cost will naturally be passed on in the payment rate for consumers. Personally, I see the base rate peaking closer to 4.5%. When the Bank rate was at 0.1% the larger lenders had a standard variable rate (SVR) of around 3.59%, so around 3.49% higher. With the base rate rising to 1.75%, the SVRs are around 5.24% – amazingly, 3.49% higher. Do your numbers on a base rate of 4.5%!
Capping energy bills will lead to inflation softening faster, but there is concern over sterling once again. If the central bank does not act quickly then sterling will come under more pressure as investors sell it.
As the UK is a net importer confidence and the value of sterling are crucial; every movement down forces costs up, as imports are bought in a more expensive currency, driving inflation higher and, in turn, the pressure on interest rates. It’s a negative feedback loop, and as attractive as a ‘reality’ TV show.
The UK’s inflation remains the highest in the G7. Liz Truss’s policies arrived one day after the Bank of England’s decision and are inflationary, and likely to make the Bank want to increase rates further. It’s strange that the Bank wants to slow spending but the government wants to give people more money to spend to avoid an economic downturn.
I need another wall to bang into. This one is broken. I can’t recommend enough seeing an independent financial adviser now to ask about how this will affect you. For example, the broker can take your loan out to the market to see who is offering the best terms and then go back to your lender to see what terms they will offer. If the rate is more favourable you can book it now, as much as six months ahead of time. This way you can benefit from the current lower rate but lock in any new rate ahead of further changes.
If you have a mortgage query, ask our independent mortgage director, Pat Greene. Please email Pat directly on pgreene@wwfp.net or call 01872 222422.
