Crisis , Crisis, Crisis


March 14, 2014

Godfrey Blight is a director at Crown Mortgage Management

‘Crisis’ has dominated the front pages worldwide over recent days as the super power Russia crossed the border into Ukrainian territory. The question that remains to be answered is what will the West’s reaction to these events be? We know from a leaked document that the UK’s response is likely to be limited. The US has suspended military co-operation with Russia and called off all trade and investment talks as of now. However, the final position of Obama, Cameron, Merkel, Hollande and company, is still to be seen.

Interestingly financial markets are far more responsive and quicker to react than politicians and leaders of world super powers. The markets have no agenda to worry about, they simply react.  On the first day after Putin’s move in Ukrainian territory many Russian stocks had fallen by 10% due to concerns over sanctions and gas prices. As the Russian rouble reached a record low against the US dollar, the Russian Central Bank has increased its main interest rate by 1.5%. Further correction can be expected as the situation escalates or resolves itself.

In contrast, over the last five years the UK has created a generation of homeowners who have never seen a base rate rise with most having never experienced any increase in their mortgage payment. Many will still be enjoying the honeymoon period of their cheap fixed or discounted rate. How would these homeowners react to such a quick hike in rates as the Russian markets have undergone? For most it would take hundreds of pounds out of a, probably already stretched, household budget. For mortgage lenders it would deliver the nightmare of an escalation in mortgage arrears and repossessions, the like of which we have not been seen for many years and hope not to.

No one is saying that we are going to see a rate rise in the realms of 1.5% any time soon, but the sentiment will carry through regardless. Rates will go up; it is just a question of when and by how much. What can we do to educate these rate rise virgins of the need to think ahead and plan accordingly? The UK recovery has been strong and the stock market has had a great run. Could a decisive reaction to the situation in Ukraine generate our own crisis if world markets fall in reaction to conflict and interest rates rise as a result?  

In troubled times the perceived safe havens of the US dollar and gold normally are the go-to options for the world’s investors. Gold prices have seen massive reductions in value over the last year. One would expect that trend to quickly reverse should the situation on Europe’s borders worsen. Therein may lie the answer: should we invest now in gold bars to protect against higher mortgage payments if rates happen to rise steeply as world markets react?

The real question is will borrowers and lenders act as decisively as the markets when it comes to dealing with the impact of future mortgage rate rises? We can only wait and see.


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