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Stuart Gregory: Low interest rates don't mean better rates

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Stuart Gregory MM blog

It was interesting hearing George Osborne’s words during the Autumn Statement. I am paraphrasing here but the jist was ‘it’s important that interest rates remain low’.

Now, I fully appreciate that his remit is the wider economy, and not just personal finance, but this proud declaration of keeping interest rates low is, in some ways, leading the general public up the garden path.

It is short term thinking which leads the public to believe they can leave their mortgage as it is and that they will remain unaffected because ‘rates will remain low’.

Sir Mervyn King has been clear in the past that base rate will only rise as and when the economy recovers. As we all know, no one has a crystal ball and Mystic Meg’s disappeared.

It is clear in the mortgage world that the base rate, however, has little direct effect on the pricing of fixed rates – an issue which to my mind never gets enough coverage. In that respect, it is down to us as advisers to explain this to our clients.

They need to be aware of outside influences in mortgage pricing, not forgetting, of course, lenders’ own decision making on pricing once demand increases.

So we have the longer term view in the general economy that base rate will remain low. This, of course, only benefits a particular section of the mortgage market which either has a competitive tracker deal, or a specific reversionary rate linked to base rate, such as with Nationwide or Lloyds Banking Group.

We all know, however, that eventually rates will have to rise, which I feel will trigger more unhappy times for homeowners.

Rising utility bills, which up until now have been absorbed into the static or falling family income because of ‘low interest rates’, will become an increased burden.

Borrowers will approach lenders, or speak to an independent adviser, about reviewing their mortgage, perhaps finding out that their options are limited due to criteria changes on income or interest only repayment ‘vehicles’ (that term always bothers me).

Perhaps the value of their home will have fallen, again reducing their options. Perhaps the attitude of lenders towards forbearance will change. We don’t yet know but more importantly, the borrowers don’t know yet either.

The Rolling Stones seem to have chosen the right single to release in advance of their recent concerts with ‘Doom and Gloom’. You are probably thinking that after reading the last four paragraphs.

However there is lots to be positive about.

When you consider how much fixed rates have reduced this year, it is important that we all start 2013 in the same fashion as we leave 2012. Talk to your clients, remind them about the importance of reviewing their situation.

Ask them if a family member is concerned about their mortgage – let us not forget your strongest sales force is your existing clients

As a group, advisers have been through more ups and downs than Helen Flanagan in a rollercoaster.

What I have learnt most is that you can not predict the future. Make your clients aware they need to take control, and not rely on the actions of others.



Stuart Gregory is managing director of Lentune Mortgage Consultancy


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Readers' comments (3)

  • Great read Stuart, thank you.

    I think although what you say is true it's specifically only taking into account mortgages really, which of course you are going to want to fix.

    Looking back over history and looking at the economic theory of what Mr Osbourne is doing I think you will find it hard to find an economist who agrees with this point of view.

    As said, great read, but does not consider other variables.

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  • Dear Anon,

    Thanks for your comments, they are appreciated.

    Although I have great respect for economists, they won't be the ones looking over their shoulders if their predictions are incorrect!

    I think when mortgage borrowers look back on 2012 and 2013 many will view it as a missed opportunity.

    However, the only way to highlight it are articles such as these.

    I think the eventual fallout from borrowers experiencing difficulty will be more serious than many think.

    When that happens, it won't be economists picking up the pieces.

    Kind regards
    Stuart

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  • I agree with you Stuart, economists must be one of the only positions whereby you can either sit on the fence and give no prediction, or make a completely hash of a prediction and get away with it. What an amazing position to be in for them.
    What I would like to hear more about from the banks is why they can still charge people up to 10-12 times base on borrowing. Its all well and good making profit for shareholders, but does that money stay in the UK anyway. More responsibility must be taken to the consumer rather than the shareholder!

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