Are rates on the way up?
It’s a tricky task to predict the exact point, or even a close estimate, of when rates may rise. However, with the current base rate at 0.50%, it is fair to assume the future for rates can only be up.
The consensus from economists is that when the Bank of England does start to increase base rates, they will do so cautiously with an eye firmly on any recovery, desperate not to douse the flames of growth.
However as those homeowners who held a mortgage 20 years ago in March 1990 will testify, mortgage rates can climb faster than anyone thought likely, and had fixed rate mortgages been widely available, they would have been a welcome antidote to the record rates of 15.4%.
Although no one is arguing that interest rates are likely to hit double figures anytime soon, some economists are estimating that Bank of England base rates could reach 6.5% over the next 5 years.
Predicting the future level of bank base rates is one thing, but the future path of mortgage rates holds an added level of complexity. None of us have ever lived through a period of such enormous financial support being offered by a Government, and in turn withdrawn.
The reality is over the next four years, the £300 billion in support to lenders in the form of the Special Liquidity Scheme and Credit Guarantee Scheme needs to be repaid. It is hard to imagine that this process will not add to volatility in mortgage pricing for homeowners.
Martijn van der Heijden, head of mortgages at HSBC commented: “The next few years are going to be difficult to predict in terms of mortgage rates and some volatility for borrowers may well be unavoidable. The message for borrowers is that if you couldn’t afford an increase of up to 3% on your mortgage, you should seriously look to fix your payments.”
Over the first seven years of this decade mortgage borrowing grew by £180 billion more than retail deposits. If retail deposits cannot replace this funding gap and wholesale markets do not open up sufficiently, lenders will be left facing a choice of higher funding costs or the need to reduce lending.
Although mortgage standard variable rates may look attractive at the moment, they are one of the few pressure valves lenders can turn to when facing higher funding costs or the need to reduce lending. Both could be a real possibility for the next few years.