The topic du jour is interest rates and mortgage payments. Not the most scintillating of subjects perhaps but rarely has there been such speculation, concern and panic. Yet I would question whether any of this is really necessary.
Let’s examine the facts – three base rate rises in the past six months, taking interest rates from 4.5 to 5.25 per cent, a five-year high.This partly accounts for why there is so much panic. We have been spoiled by very low rates, so anything above 5 per cent somehow seems expensive. Yet, looked at in perspective, 5.25 per cent is still low.
Much has been made about the recently released inflation figures and how these indicate there is another rate rise in the offing. With the consumer price index – the Chancellor’s favoured measure of inflation – rising to nearly 3 per cent in December, 1 per cent above his target, it looks as if there is an urgent need for a further rate rise to curb inflation.
Meanwhile, the other measure of inflation – the retail price index – which is perhaps a fairer reflection as it includes housing costs, has jumped to 4.4 per cent, the highest level since 1991. This makes people jittery because who can forget the housing market crash and all that negative equity? But the major difference between now and then is interest rates: they were 11 per cent then – which is the main reason why so many homeowners could not cope with their repayments.
The reality is that someone with a £100,000 mortgage on a variable rate will now be paying an extra £62.50 a month following the three rate rises. Although there has been a lot of panic about switching to a fixed rate, most borrowers should be able to cope with increases on this scale.
Should we be panicking about a further rate rise? Some lenders have already lost the plot, raising fixed rates twice in a single week. Brokers have been frantic as they try to stay abreast of developments and keep clients happy. Homeowners have been rushing to take out fixed rates. Would-be first-time buyers have sunk further into despair.
But this may have all been rather premature. The minutes of the monetary policy committee for January’s meeting show a split decision, with the governor of the Bank of England Mervyn King having the final say in favour of a rise. Swap rates responded by falling off slightly, as the prospect of an imminent rate rise rescinded. This happened the day after Mr King hinted that we are nearing the end of the interestrate-raising cycle.
This is excellent news, which should produce a calmer environment. But has the damage already been done? Are there thousands of borrowers now on relatively pricy fixed rates when they would have been better off with a cheaper tracker or discount?
There could be a lot of borrowers who fixed unnecessarily. But if they took the advice of an on-the-ball broker who considered their circumstances before suggesting what they should do, they would only have opted for a fix if they could not cope with rate fluctua-tions. And if that were the case, the broker should have moved quickly enough to secure their client one of the sub-5 per cent two-year deals.
Brokers will inevitably have had clients asking whether they should fix. But the broker worth their salt will have stood firm if they thought the client would be better off on a tracker.
Mark Harris is managing director of Savills Private Finance.