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Stuart Gregory: Will forward guidance lead borrowers up the garden path?

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It was interesting news from the Bank of England last week on forward guidance. It brings clarity in some ways on the future of the Bank of England base rate but is it in danger of leading some mortgage borrowers up the garden path?

A declaration of no interest rate rises until the third quarter of 2016, with the pre-requisite of unemployment having to fall below 7 per cent, is clear. However it’s how this information is interpreted which worries me. What will be the UK borrowers understanding of this?

The coverage of the decision so far has, I feel, led most borrowers to believe that there’s no risk to them financially from potential mortgage rate rises until 2016. But have we not learned anything from the SVR increases by numerous lenders during 2012? No one expected that to happen and, when it did, many speculated Halifax would be alone in that action. I predicted it would not be the last and it was not.

The base rate may not change before 2016 but the options available to borrowers trying to protect their futures will and there are many issues to be navigated.

Do not forget the planned removal of the Funding for Lending Scheme in January 2015 which underpins the current competitive fixed rates on offer to borrowers with their fingers – or their brokers – on the pulse.

As advisers, we need to make our clients aware now of the threats that the removal of FLS will bring. When lenders go back to the money markets mainly for their funding, who knows what rates will be on offer? Some borrowers may then wish that they’d reviewed their mortgage sooner.

Borrowers need to reassess their own circumstances now to ensure that they do not place themselves in a difficult situation. Doing nothing may not be the wisest move.

When you consider that even existing Nationwide and LTSB borrowers, some of whom are paying 2.5 per cent on a base rate linked reversionary rate, should now be considering their options instead of the ‘sit tight’ method, it shows you how quickly the market has moved.

There is also the misconception that the BoE base rate has a direct effect on the alternatives available to borrowers. This alone could lead some borrowers not to review until 2016 and miss the boat on really competitive fixed deals.

Sir Mervyn King can rest in his retirement chair admiring his portrait, in the knowledge that he indicated all along that base rate would only move when the economy improved.

I am left wondering now, with the more positive economic news released since Mark Carney’s announcement, whether the prediction of 2016 should have been issued with a wealth warning.

Stuart Gregory is managing director at Lentune Mortgage Consultancy

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