Currently the base rate which drives the cost of loans is at a historical low of 0.5%. Since the millennium it’s been about 5%.
The benefit of this low rate is anyone who has mortgage debt, despite the drastic fall in house prices and pressure on family budgets, has been able to continue to afford their mortgage, substantially reducing mortgage payments. For example, the mortgage payment on my house is now around £400 a month less.
However, not everyone has won from the decision to reduce the base rate. Savers for example, historically, have been around 4-5% since 2000, whereas now rates are, if you are lucky up to 2-3% at the most.
However although savers have suffered, some people have benefited tremendously from the falls. For example, anyone with high Loan to Values of 40% plus have had access to unbelievable rates of around 3% or even less.
People on base rate trackers have been paying in some cases nothing or just 1 penny for their mortgage. In my case, I have two mortgages. One is 0.99 above base and the other 0.47 above base – for life. So I have hardly had to pay any mortgage since rates fell so low. In one case as we’ve carried on with the normal mortgage payment and overpaid, we have halved the time to clear our mortgage from 16 to just 8 years.
Finally, any new home build buyers who have bought via the Help to Buy Scheme putting down a 95% deposit with the government pitching in up to 20% has allowed them to secure low rates of 3-3.5%.
A rise in interest rates IF followed by a rise in savings rates that would be good news for savers, may mean money in the bank actually earns them some interest.
Currently inflation ie the cost of buying things is going up around 3% a year, so if you put money in the bank, get a saving rate of 2%, then a £100 in a year’s time would be worth £102, but the cost of buying goods would be £103 – so your cash is actually falling in value. And over the five years, this would mean your £100 would have increased to £102 after year 1, £104.40 in year 2 and by year 5: £110.40. Meanwhile the cost of goods would have increased from £103 in year one to £115.93 in year five. So, in ‘real terms’ you are £115.93 - £110.40 = £5.53 worse off.
Over the long term rates are 5.5% and since 2000, they have been as high as 7%, so it’s always worth checking you can afford the mortgage you have or are considering, at 5-7% interest rate levels.
Potential losers of the interest rate rises include unsuspecting first time buyers buying since April 2013, who have taken on a large mortgage at a low rate, but can’t afford it at 5-7%. See our Help to Buy Checklist
Other people include those who have ‘hung on’ to their property thanks to the low rate, but will struggle to afford their mortgage at normal levels. This will include Buy to Let investors who have invested in a rental property with low yields – ie less than 5% yield. At low mortgage rates, this might work, but at an average of 5.5% this will actually end up with the rental investment losing money on a monthly basis if the investor has bought with a 25% deposit.
HML estimate that the number of people who will struggle to pay their mortgage long term, estimate there are around 30,000 out of the 12 million mortgage borrowers who could be in trouble if rates rise. However, it’s interesting to note that during the ‘boom times’ there were 25,000 repossessions a year, while this year, despite the recession, negative equity levels and difficulties caused to families through a lack of wage rises, the number of repossessions is only expected to be 30 to 35,000.
So, one of the difficult things Mark Carney has to deal with when considering raising interest rates is how it will affect those that are vulnerable and reduce the impact on property markets which are still 15-30% down versus property heights of 2007. Visit our Negative Equity Checklist
A rise in interest rates is likely to slow down the property market as it will make affordability more difficult, so there will be less buyers around.
Bizarrely no-where near as many as you think. What most people or commentators/analysts don’t appreciate is how much ‘property wealth’ we have in the UK.
According to the Halifax 40% of our wealth is in property. That’s a staggering amount of money. And according to Savills, in the 12 months to June 2013, 35% of people bought a property with 100% cash, so wont’ be affected at all by mortgage rates.
For those who do buy with a mortgage, there are equally astounding figures. Savills research shows if you add up the value of all the properties bought in the 12 months to June 2013, only 38% was bought with a mortgage, showing the average loan to value (LTVs) is just 62%. As lenders want to compete at 40% LTVs, this means their best rates are being offered, so even a rise in interest rates won’t affect homeowners as much.
The good news is that interest rates aren’t expected to rise for a year or more – yet. This gives those worried plenty of time to prepare and plan for help.
Key steps for anyone concerned about an increase in their mortgage costs are:-
See here for a list of all our checklists.
