The rise in the Bank of England's base rate earlier this month was as small as it could be but that did not stop the anticipation and subsequent analysis of the 0.25 per cent rise to 3.75 per cent probably filling more column inches than the previous 12 rate announcements combined. This small change is big news and is likely to alter the emphases of advisers' dealings with their clients.
What sorts of subjects are being pushed up the agenda by the recent base rate rise and the outlook for the coming months and years? How challenging is it to ensure that clients really listen to some tough home truths when the economic climate shifts?
Naturally, remortgaging business becomes even brisker than usual when rates creep upwards as even apathetic borrowers get ready to search for the best deal.
Informed Choice managing director Nick Bam-ford says: “Remortgaging is taken very seriously when rates rise and for more and more borrowers switching mortgages has become common currency. We outsource our mortgage enquiries to another broker and he is extremely busy at the moment.”
Finding the best mortgage deal is clearly a positive step that advisers can take with their clients, which can put extra cash in their pockets within weeks. But other discussions about property, as rates move upwards, might prove trickier.
Dennehy Weller & Co managing director Brian Dennehy explains. “We are talking more and more about bringing debts down and reducing clients' exposure to property. Some individuals will be massively overweight in property having built up a portfolio of buy-to-let homes.” Dennehy feels this is among the thorniest issues to discuss with clients, even after an interest rate rise starts to erode profits and widely predicted further rises start to cloud the outlook for future rental yields. “The problem is that people do not invest in property, they fall in love with it. Clients can feel very deeply even about those properties they buy for investment purposes in a way they never will about a corporate bond fund,” he says.
Towry Law product research manager Simon Farrant says people with very big buy-to-let exposure need to be considering their position. He says: “If you are operating in a highly geared environment such as this, a rise of 1 per cent will be hard to take.”
But even with the low interest rate party looking as if it is drawing to a close, advisers can feel as if they are talking to a wall, both on reconsidering buy-to-let portfolios and on debt.
Dennehy says: “Now is the time that we really start to beat people about the head and try and get them to think about dealing with their debts but they never listen. They did not all listen to our advice in the late 1980s before rates started to rise and some seem just as reluctant now.”
Currently, there are more than 50 credit cards offering borrowers introductory rates of 0 per cent and personal loan rates have been extremely competitive, with some of the lowest being barely more than some mortgage lend-ers' standard variable rates. But the easy and cheap credit environment will start to harden if rates continue to rise.
Farrant says: “Paying off debt is a recurrent theme. Short-term debts such as credit cards, personal loans and hire purchase agreements have been very competitive but clients need to understand that as the base rate rises so will interest on these products.
“Not so much for Towy Law's clients but perhaps for those advisers with clients in expensive debt, paying off this short-term debt can still be the best investment they could possibly make as the rates of interest are far higher than they can get through any investment vehicle.”
Although banks are commonly accused of dragging their heels when raising saving rates, base rate rises usually feed into higher rates for savers. But some advisers feel this encourages clients to feel safer with higher-risk saving and investing vehicles, with sentiment seemingly boosted by base rate rises.
Farrant says: “It is not so much the rate rise of 0.25 per cent, it is what it represents in terms of the way that the Government is viewing the economy that is more important. In our client reviews, what we are seeing is a greater willingness and confidence to enjoy investment in equities.”
Dennehy says: “Generally speaking, we have been talking more about being less in fixed interest – gilts and corporate bonds.”
The fact that some clients with the right risk profile are now willing to get back into equities is good news, not just for the obvious reasons, but because clients will have a heightened awareness of risk.
Bamford says: “I have no problem with those experiencing a new-found enthusiasm for equities in the current environment. Clients would had to have been living on another planet to avoid realising the lesson of the last three years – that equity markets can go down as well as up. Investors returning now are doing so with their eyes open.”