Prepare now for predicted interest rate hikes
By Benjamin Salisbury
The Bank of England cut the base interest rate to 0.25% in August 2016 - from its previous record low of 0.50% - to reassure households and shore up confidence in the economy after the Brexit vote to leave the EU.
However, the next move in interest rates is likely to be upward. If that were to happen, consumers would be affected. Are you prepared for the transition?
are rates in flux?
The impact of Donald Trump's US election victory might not, on the surface, seem likely to affect interest rates in the UK. However, his expected policies have caused "swap rates" - the rates paid by lenders, which influence mortgage rates - to rise. Since Trump's election, long-term borrowing costs for US financial institutions have risen sharply, and the cost of borrowing for UK banks has followed suit.
"Immediately after the Brexit vote in June we saw swap rates plummet, allowing lenders to cut mortgage rates left, right and centre," Simon Collins, product technical manager at mortgage broker John Charcol, said in an emailed response to questions.
The UK's 10-year borrowing costs have risen to 1.49% from a historic low of 0.506%, the level they fell to after the Brexit vote, which led to some of the lowest mortgage rate deals ever seen in the UK. Now, following Trump's victory and the increase in 10-year borrowing costs, banks are beginning to raise rates. This is encouraging many borrowers to take advantage of low, long-term, fixed-rate mortgages while they can.
"But, since late summer, those money market rates have been steadily rising to reflect the growing uncertainty around the world."
In the middle of November 2016, the best five-year fixed rate mortgage deal was on offer at a rate of just 1.84% from HSBC, and 10-year fixed rate deals were available from 2.49% from Barclays for homeowners with a 60% LTV.
A month later, the HSBC deal is still available, but the Barclays rate has edged up to 2.59%. The Skipton Building Society has raised its rates on some of its mortgages by 0.37%, and the West Bromwich Building Society has withdrawn its 10-year fixed rate mortgage deal at 2.59%.
"Trump's victory added another massive uncertainty into the mix of political and economic unknowns, and it's driving people to want to lock in to the longer term fixed rates on offer today," Collins said.
will rates rise - and by how much?
"We expect the UK economy will perform reasonably well over the next few years, and by 2019, or possibly even sooner, a move away from the current ‘emergency' levels of interest rates will be justified," a spokesperson from Capital Economics said in an emailed response to questions. The Bank considers a non-emergency rate to be between 2 and 3%.
The spokesperson's comments suggest a rate rise in 2018, but even if the Bank doesn't raise rates before then, it is important to ensure that you're ready for a rate rise.
Mark Carney, the Governor of the Bank, recently warned about the high level of debt in the UK, with new figures showing credit card lending at a new record high, up by £571m from November to December 2016.
Carney said Brits are increasing their debts at the fastest rate since the 2008 financial crisis, and the average adult now owes £30,000. Mortgages account for 87% of that, but credit card debt is the biggest chunk of unsecured debt, with the average household owing £2,400 on plastic.
Carney encouraged households to pay down debt ahead of a rise in interest rates, which would increase the cost of borrowing for mortgages, credit cards and other products.
If you have an outstanding mortgage of £100,000 repayable over 25 years and you are on a rate of 1.92%, you are currently making repayments of £419. If your rate were to rise to 3.92%, your monthly mortgage repayments would increase by £104 to £523. The increase will be higher if you are repaying the loan over a shorter term.
can you do to prepare?
It is important to remember that rates won't go up by this full 2% at once. Carney and his colleagues at the Bank have been at pains to point out that when interest rates are raised, they will be increased gradually over a period of a few years.
Pay down debt now, if you can, by making overpayments on your mortgage. This can significantly cut the length of time in which you repay your mortgage and save you thousands of pounds in mortgage interest repayments.
Pretend your rate has gone up by 2% and calculate what the new repayments would be. If you can afford to, start paying that amount now, but check the mortgage terms to ensure you are not overpaying more than is allowed, usually 10% a year, otherwise you may face early repayment charges. By overpaying now you are also proving that you are ready for the higher mortgage repayments when they eventually come.
Similarly, switching credit card debt to a low rate balance transfer card will potentially save you hundreds of pounds in credit card interest repayments. Balance transfer deals are currently available charging no interest for up to 41 months, though a 2-3% fee on the balance you transfer is normal. To avoid interest, divide your balance by the number of interest-free months, and be sure to pay that amount each month.
By building in the expected interest rate rise to your budget, you are taking financial steps that will protect you from an interest rate rise, a time when it may be more difficult to access cheap credit and when inflation is expected to rise.
Updated: 20 December 2016
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