A New Year and new challenges for the mortgage market
Frank Eve is managing director of Frank Eve Consulting
As I gaze into my crystal ball for 2014 one of the crucial issues going forward is what is going to happen to interest rates. As I think about this I am reminded of the play Arcadia by Tom Stoppard, where one of the characters makes the following insightful statement: “When you stir your rice pudding Septimus, the jam spreads itself round making red trails like the picture of a meteor in my astronomical atlas. But if you stir backwards, the jam will not come together again.”
And so it is with interest rates. The Bank of England has been stirring jam in the form of low interest rates into the mortgage market for the last five years but is the time coming when the spoon will be pushed the other direction?
Some commentators such as Andrew Sentence, a past member of the Bank of England’s Monetary Policy Committee and a current member of the Shadow Committee, feel we need an immediate rise in interest rates to 0.75%. There is a growing feeling among some other commentators that there is no justification for super-low interest rates at a time when the economy is growing at an annual rate of about 2%. The Bank of England in its “Forward Guidance” has indicated that interest rates will remain where they are until unemployment falls to 7% but as a result of strong growth at the end of last year this may need to be revised if interest rates are to remain where they are by the end of 2014.
With the Federal Reserve in the USA unwinding Quantative Easing and Government Bond yields increasing, the ‘spoon’ has now starting to turn in the opposite direction and how soon before interest rates start to rise in the UK and what will be the result?!
Before we all start to panic we should look at what is likely to happen. Even with ultra-low interest rates the borrowers most in need, first time buyers and those struggling to re-mortgage because of a poor credit history are currently getting very little support from low interest rates as Lenders are achieving historically high margins all areas of the market. With provisions coming back into profit, as house prices rise, and the full effect of PPI claims past its peak it is about time that lenders adjusted their lending margins back to more reasonable levels. This would allow the room needed for the small increases in interest rates some in the industry are calling for and also bring an end to all the silly talk of a new housing boom.
The spoon may now be starting to turn in the opposite direction but where interest rates will be at the end of 2014 is still unknown. However, just as the jam in the rice pudding does not return to the same place, an increase in interest rates will not return the mortgage market to where it was five years ago. Whatever happens we all hope that there will still be some jam left in the market for borrowers, brokers and lenders by the end of 2014.