Interest rates are sure to rise, and with the Bank of England announcing that its policy rate will now rise 0.5 percentage point to 2.25 per cent, its highest level since 2008, homeowners and investors alike will be counting the pennies.
Interestingly, last week I was asked about a Forward Index Swap (OIS) curve and what that means for interest rates! Oops. As you can see this is a very specific and clever question, but what does it actually mean and is it relevant to determining rates/inflation and therefore the value of your homes?
Remember that the UK is a debt driven economy and the comfort of having equity (gap between home value and debt/mortgage) is the big confidence booster for the economy. In reality, it shouldn’t mean anything other than “You owe x amount”.
The OIS is a “forecast” of where interest rates will be at some point in the future, so this curve is clearly pointing down for years to come. The chart is now on a strong uptrend, peaking at about 4.5 percent, but will nosedive in the coming years, leveling off at about 2.8 percent in five to six years.
Am I giving that much faith? Hardly. It’s like predicting the weather in two years by sticking out a wet finger now. For example, on the date of the Monetary Policy Committee meeting on August 22, the same forecast curve (one month old) showed that interest rates peaked near the new low of 2.8 percent and fell to a low of 1.8 percent. That’s quite a gap in a month (see note above on wet finger).
I stand by the fact that much of the inflationary pressure is temporary and has a root cause, a root cause that can be addressed with the right appetite and approach.
However, this does not help a homeowner or borrower. This effectively becomes a gamble and the odds are on losing a home and security, or at best, selling it in a market where the buyer is the winner. History doesn’t repeat itself, but it often rhymes.
Planning and calculating is better than risk. As I’ve said for the past two years, going for a slightly longer fixed rate would have been a good move so you know what you’re budgeting for.
The FCA says they expect average base rates of three per cent, ranging from 2.5 per cent to four per cent, and that of course these costs will be passed on to the consumer payment rate. Personally, I see the policy rate close to 4.5 percent. When the BOE rate was 0.1 percent, the larger lenders had a standard variable rate (SVR) of about 3.59 percent, about 3.49 percent higher. As the base rate rose to 1.75 percent, SVRs are around 5.24 percent — an amazing 3.49 percent higher. Calculate at a base interest rate of 4.5 percent!
A cap on energy bills will lead to a faster deceleration in inflation, but sterling concerns have returned. Unless the central bank acts quickly, sterling will come under more pressure as investors sell it. With the UK being a net importer, the confidence and value of sterling is vital as any move down drives up costs as they are being bought in a more expensive currency causing inflation and hence pressure on interest rates elevated.
It’s a negative feedback loop and as appealing as a reality TV show.
UK inflation remains the highest in the G7. Liz Truss’ policy came a day after the Bank of England’s decision, and that policy is inflationary and will likely cause the Bank of England to hike interest rates further. Strange that the bank wants to curb spending but the government wants to give people more money so they can spend more to avoid an economic downturn.
I need another wall to hit. This one is broken.
I cannot recommend enough to consult an independent financial advisor now to ask how this will affect you.
For example, the broker can put your loan on the market to see who is offering the best terms, and then go back to your lender to see what terms they are offering. If the price is cheaper, you can book it now, up to six months in advance. This allows you to take advantage of the currently lower interest rate but lock in any interest rate before further changes.
:: Peter McGahan is Chief Executive of independent financial adviser Worldwide Financial Planning, which is authorized and regulated by the Financial Conduct Authority. If you have a mortgage inquiry please contact our Independent Mortgage Director Pat Greene ([email protected]) or call 028 6863 2692.
