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Rate dilemma

Mortgage View

There is a dichotomy as intermediary firms are desperately keen to see remortgage activity increase, yet a rise in rates could precipitate widespread payment problems among mortgage borrowers, which the Government must avoid.

Not for the first time, Martin Weale of the Bank of England monetary policy committee has gone out on a limb, urging his fellow members to vote for an immediate quarter-point rise.

In a speech to MPC members on June 13, Weale suggested that a rise in interest rates now would prevent more “aggressive tightening” further down the road.

Inflation has now been more than twice the bank’s 2 per cent target for 51 months and Weale predicts that, without action, we will see inflation rise above 5 per cent before the end of the year.

In theory, a base rate rise would relieve inflationary pressure but my view is that an immediate hike could choke our weak economy. I agree with one industry guru who recently stated: “With no tax rises and no wage growth, there is no excess in the system to warrant an immediate hike. The change in gear would be superficial.”

Many folk in our sector cannot wait for a rise and I must admit it could stimulate demand for mortgage advice, which appeals. I have sympathy with Precise’s Alan Cleary who states: “The current BBR at 0.5 per cent is not sustainable, so in order to get us back nearer to the long-term average, a 0.25 per cent rise early should be tolerable.”

A counter view is that if the MPC conceded a rise to rates now, it admits its initial economic analysis was flawed. Stephen Lewis, economist at Monument Securities, asks if a rate increase was not justified last year when economic demand appeared to be rising, why should it be justified now that demand is slowing down alarmingly?

It is difficult to understand why two out of the nine MPC members are pushing for immediate action. Has media and public pressure spooked them so much they feel forced to act? Does the MPC really think consumers will thank it for higher mortgage payments while the cost of living remains so high, especially given that Legal & General Investment Management’s current figures suggest 90 per cent of borrowers are currently on a variable mortgage rate, compared with just 60 per cent in 2007.

For now, consumers can be thankful the majority of MPC members are keen to stand firm with the decision to hold the rate at 0.5 per cent, even if that results in fewer transactions.

Until such a time that a rate rise is a practical solution, intermediaries should nonetheless continue to enjoy steadily increasing new business from those looking to take advantage of rates that remain at a record low. Despite current BBR consistency, we must not ignore our key responsibility to remind borrowers that rates will eventually return to more normal levels, probably in the region of 5 per cent.

Bank rate rise or no base rate rise, consumers continue to need our advice and are well placed to eradicate the risk of rate shock by grabbing a sensibly priced deal while they can.

Rob Clifford is managing director of If I Were You


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