Interest Rates...I may have been wrong!

I often tell my kids that they should hold their hands up if they are in the wrong, well it appears my recent blog about Bank of England interest rates may have been written in haste! If you must, you can read it here. In fact since publishing the last blog all the talk has been of an imminent base rate rise. Mark Carney even said as much last week.

So what of the outlook? Well the economists are saying a little rise in the interest rates will help in preventing the economy running away with itself, which will help keep a lid on inflation.

The MPC do not meet until November now so we have a bit of time to breathe and a bit of time for more news to counter the rise or add fuel to the talk of a rise. I have just received an email from Barclays saying they are withdrawing some of their headline fixed rate deals this week and they expect the replacement deals to be higher, this to me could be an indication that their boffins see a rise in the offing too.

Still, as the Bank rate is 0.25% right now and there are only two rate announcements left this year I’m going to stick with my original prediction of the year ending at 0.25%. In my corner we have had nine base rate meetings since the historic reduction of August 2016 and in all but three of those the votes were unanimous in keeping rates at the all time low of 0.25%. The last three meetings have seen two of the nine committee members vote for a rise to 0.5%. Will there be enough of a swing before the year is out to push the rate back up? I’m not convinced.

However, if the rate is pushed up it is only going to go to 0.5% and that is still very low, and given the huge uncertainty surrounding the economy at the moment I think the Bank will leave it alone at 0.5% for some time, if indeed they raise the rate at all.

In conclusion I may be wrong about interest rates staying put but please do not panic, I cannot see them going high, we are not in the 1990’s now.

Give me a call if you would like to discuss this further, and how it may affect your mortgage or your options for taking out a new mortgage. Please don’t hold me to any of my predictions though…!

Bank of England Base Rate - Don't believe the hype!

Last week the Bank of England voted to keep the base rate at the all time low of 0.25%; the rate it has been since the post referendum, recession avoiding drop of 2016. The voting was 7-2 in favour of maintaining the rate, this has been pretty much the pattern for the last year yet this time there was a lot of media noise about an imminent rate rise.

While I understand the need to have something to report I wholeheartedly disagree with the predictions of a rate rise in 2017. I have consistently maintained in previous blogs (go look!) that rates are not going to rise significantly given the economic climate.

Will Interest Rates Rise?

There are one or two indicators that suggest the monetary policy committee may lean towards a rise. The first is the level of employment, some good news statistics were released last week stating that employment has never been higher in the UK and those claiming unemployment benefits has never been lower. I remember a few years ago when Mark Carney suggested that rates might go up when unemployment fell below 7% and he quickly had to change tack when unemployment fell below that level. It just was not the right time to raise rates.

The other main indicator of a potential rate rise is inflation; again traditional economic theory suggests to kerb inflation you raise interest rates. I have to say this theory has carried less weight since the credit crunch of 2008, inflation has fluctuated up and down and interest rates have been broadly the same, suggesting to me that the decision makers are taking a more pragmatic view.

So why do I think rates are not going up? Again there are likely to be many factors that the decision makers take into account however as I am not one of those people I like to take a more simplistic outlook on these things.

Firstly as a nation we are pretty highly geared, what I mean by that is that we have enjoyed borrowing money in recent years, the low interest rates have fuelled a lot of borrowing and frankly a significant rise in rates would see a lot of us struggling. Put simply if you are paying more on your mortgage each month you are going to spend less elsewhere and I don’t think the economy can’t take that kind of hit.

Uncertainty fuels doubt in the economy and I think the post Brexit uncertainty has led to a fall in the housing market. I can only speak personally here but it just feels much quieter than it did 18 months ago. If the Bank of England put rates up, even by a little bit, that is going to add fuel to that uncertainty and the housing market may suffer more as a result.

Finally the main reasoning for my argument is wages. In previous blogs I have stated that only when wage inflation starts outstripping actual inflation will the Bank of England decide to raise rates. All you need to do is listen or watch the news to see that wages are most certainly not rising in line with inflation. The 1% pay cap on public sector employees for the last few years is going to take a bit of time to catch up with inflation, even if they get their 3+% this year. The headlines last week were that wages have actually fallen in real terms meaning we all have less money in our pockets. In these circumstances I think it highly unlikely that the Monetary Policy Committee will vote in favour of a rise.

If you’re concerned about interest rates and your mortgage, please don’t hesitate to contact me for an informal chat about your circumstances and to discuss your options.

Inflation, Interest Rates and House Prices

There has been some interesting data released this weekwhich all has an effect on the economy; but what does it mean for those of us with an eye on the housing market?

Inflation has fallen this month to 2.6%, this is the CPI (Consumer Prices Index) measure and it is down from 2.9% in May. Historically the fiscal measure to try and stem inflation would be to raise interest rates but as I’ve said before these are not normal times. Since the financial crash of 2008 interest rates have been super low and inflation has rollercoastered its way along. It seems like other factors are effecting inflation, the value of the pound for example can have an impact. If you need to import goods to produce your product and the pound is weaker than before then you are going to increase prices. I think this has been the main driver in pushing inflation since the Brexit vote of June 2016.

With this slight drop in inflation perhaps we are seeing a levelling off or a “settling down’ as Bank of England Governor, Mark Carney, said last month.

The fact inflation has fallen a little does ease pressure on the Bank of England to raise rates and perhaps just sit out the Brexit negotiations and see what they bring. The Brexit negotiating period may well be a challenging time for the British Economy.

As I have repeated many times in my blog, keep an eye on wage inflation. This is still low and until it outstrips inflation then I can’t see a significant interest rate rise.

So with interest rates set to remain low for now what does that mean for house prices?

Well, interest rates are not the only factor in house prices. As my old economics teacher once said, “all you need to know is supply and demand and you’ll pass your exam” (he wasn’t entirely right on that one!). However housing is all about supply and demand. In the UK we have a housing shortage, more people want a house than there are houses, to put it simply. Therefore this demand for housing will keep pressure on the prices and cause them to rise. In June, RICS reported growth had slowed to 4.7% year to date. Slowed, but prices still rising.

On top of this if you factor in the report earlier this month that said estate agents have the lowest stock of properties since 1978. As always prices do see regional variation. If we look here in Surrey I can see low availability and high demand for areas within commuting distance of London with good schools, and I just can’t see prices falling in those areas.

So if you are selling in theory you should get a good price for your property, if you are buying expect to pay at the top of your budget.

With interest rates low, now’s a good time to review your current mortgage arrangements and see whether you can get a better rate by remortgaging. If you’re looking to move house and require a mortgage, you will also need to explore what mortgage lender’s are prepared to lend you to enable your purchase. If you require any support finding the right mortgage product, or would just like to talk through your options, call me on 01252 759233 or email richard@thesurreymortgagebroker.co.uk

What does the Election 2017 Result mean for the Mortgage Market? If anything?

So unless you’ve been living under a rock for the last few days you will know that Theresa May sort of won the General Election and has formed a minority government. The Conservatives won the most seats but fell short of an overall majority, which they wanted to be able to put themselves in a strong negotiating position when it comes to the Brexit issue.

Now that the dust has started to settle from the initial shock of the result what can we expect in the coming months and years for mortgages and the housing market?

The Brexit Effect

Running a business that is largely dependent on the housing market I can say from my perspective that the decision to leave the EU has affected the housing market. This may not be the view of other brokers but I would say that housing stock has fallen and the number of transactions have fallen. It feels very much like the housing market was post credit crunch. It also feels like there are fewer buyers around as people perhaps decide to sit tight instead of making major life decisions, like moving house.

The difference between the credit crunch time and now, is that money is cheap. It is easier to get a really competitive rate and this makes moving house still a viable transaction, as the interest rates are so low.

As ever with the housing market there will be regional variations. House prices are still rising nationally but not as quickly as before the referendum, probably a good thing. It is the reasons behind this slowing that might be a concern. My opinion is that this is down to lack of demand. If you thought your house was worth £x in Jan 2016 you might get a few interested parties competing with each other and actually achieve £x plus a bit more. Now the likelihood of competing buyers is pretty low.

Strong and Stable?

In order to bring some clarity to the country’s future Theresa May wanted a strong mandate to be able to show our European friends that she was fully supported by the great British Public. Unfortunately for her it didn’t quite work out that way. Commentators are now saying this might lead to a softening of the “hard Brexit” stance taken by the Tory party. I think largely it has led to uncertainty, which is not ideal. Uncertainty is what has led to the slowing of the housing market since the referendum so therefore if this uncertainty continues then I can’t see anything changing. Some readers might however feel positive about the election result, if the softening of the Brexit does happen then those “Remainers” might be appeased and feel more positive about the future.

What About Interest Rates?

Inflation is up to 2.9% and over the prediction made by the Bank of England (they said 2.8% by the end of the year). Historically a rise in inflation would mean a rise in interest rates but in this post financial crisis world in which we live this has certainly not been the case.

What the election result will not lead to is a rise in interest rates. Interest rates are out of government control and this is a good thing. The Bank of England make the decision and I don’t think rates are going anywhere until 2019 – that my friends is a prediction, not a promise!

Why do I think this? Although unemployment is low and we have the highest level of employment for a long time the key factor is wages. Wage inflation has been lower than price inflation for most of the last ten years. You will need to see a prolonged period of wage inflation outpacing price inflation before you see a rise in interest rates.

With the right deposit/equity you can secure a five year fixed rate mortgage at below 2%, if the lenders are happy lending for that length of time at such a low rate then they don’t think rates are going up either.

What Should You Do If You Want To Move Or Remortgage?

I would advise you to speak to a mortgage broker, like myself, or a financial advisor and discuss your specific circumstances. If the Election result or Brexit negotiations is creating uncertainty in your life – such as your job security – it may be that you could remortgage now to give yourself a bit more peace of mind.

If you’re looking to buy and selling a property is not an issue, it’s a buyer’s market for the moment and those low interest rates may also work in your favour.

Contact me if you would like to discuss any of the above in more detail or have an informal chat about your specific requirements.

Up or Down? What are Interest Rates like to do next?

At this time last year, the financial market was predicting fairly confidently that the interest rates would be rising by the start of this year. However, the reality has been something quite different. Numerous political, economic and global events have meant that what we actually saw was the Bank of England further slashing interest rates from 0.5 per cent to 0.25 per cent in August 2016.

So where will our interest rates go next? It seems almost impossible that they could be reduced any further, what with the current rate being the lowest ebb in history. But when should we expect them to rise, and how much? Let’s investigate.

What’s happening to affect the current interest rates?

We’ve been through an eventful year or two when it comes to major changes to the UK’s economic influences, for example:

• Economic concerns: In recent years, we’ve been suffering a period of negative inflation. Weak economic data coupled with concerns over a slowing global economy have led to much uncertainty over how and when things will change.

• Brexit: Prior to this, the Bank of England (BOE) had been discussing forthcoming rate rises. After the vote, and predicting an economic slump, Mark Carney announced the interest rate cut and a new bout of Quantitative Easing to try and stimulate growth.

• The fall of the pound: Since the Brexit vote, the value of the pound has fallen by around 20 per cent. This has caused inflation to spike, which tends to lead to an increase in interest rates, although the BOE’s predictions did not fit with this.

• Trump: Donald Trump’s victory across the pond has added some uncertainty to the future of interest rates. Because he is planning to spend, spend, spend on infrastructure and building in the US, inflation over there is anticipated to rise, which could have a knock-on effect here in the UK too.

These events are undoubtedly responsible for the unexpected rate cut we experienced in mid-2016, and for the continued uncertainty over the future of our interest rates.

Predictions for the future

We’ve seen some wild predictions about the future of interest rate rises. Here are some of the most commonly encountered predictions you might come across right now:

• Financial experts: The first interest rate rise will occur in late 2019, raising the rate to 0.75 per cent. Following this there will be a further 0.25 per cent increase at regular intervals, with the rate at the end of 2020 predicted to hit 1.25 per cent.

• Lenders: Mortgage rates are extremeley competitive and I’ve always said that the lenders pay economists to analyse the markets who are in a much better position than I to predict but take a look at what you can get on the market for a five year fixed rate. Less than 2% is readily available with a reasonable deposit, if the lenders are happy to lend at this rate then they don’t think rates are going up significantly.

• The Bank of England: BOE, at their last meeting of 2016, predicted that high inflation and slow wage growth would keep households financially squeezed into 2017. They voted to keep the rate at 0.25 per cent and, barring any major changes, are not likely to change this in the near future.

• Commentators: Larry Elliott, Economics Editor for the Guardian, predicted that although rates are going up in the US, they are going nowhere in the UK. However, the Telegraph’s specialist, Roger Bootle, predicted rates would hit three per cent within three years, and five per cent eventually. I heard Roger Bootle speak at a conference late last year, he was very interesting but I can’t agree with him that rates are going to be at 3% within three years.

• Howard Archer, chief UK economist at IHS Global Insight: “The Bank of England could become increasingly nervous about the inflation overshoot and feel compelled to raise interest rates – although we suspect that this would be more likely in 2018 than in 2017.”

Despite a range of opinions and predictions seen here, for the most part the outlook is very similar: Nothing will be happening in the very near future. Whether that holds to be true, only time will tell, although we can look to certain economic indicators to give us, at least a little, advanced warning.

Economic indicators for the BOE rate rise

Some key economic indicators will play an important part in whether interest rates rise, fall or stay the same. These factors include:

• Inflation: In April 2015, it was at -0.1 per cent. It’s currently at 1.8 per cent and the National Institute of Economic and Social Research estimates it could get as high as 4 per cent in 2017. If the rate suddenly spikes, the BOE could be forced to raise interest rates sooner than planned. Historically raising interest rates has been a way of calming inflation so if inflation gets out of control this could lead to a rise, however in more recent times the Bank of England have not used this tool in their armoury. They appear to have preferred the waiting game.

• MPC support: For years, some members of the Monetary Policy Committee (MPC) have argued for a rate rise, but since the Brexit vote, this has changed. For a while, the committee even argued for a lowering of the rate to 0 per cent, so it remains to be seen how this support will swing as 2017 plays out.

• Strength of economy: The BOE lowered the base rate in 2016 in anticipation of a weakening UK economy. However, this has not happened as predicted, which strengthens the case for a rate rise, rather than any further rate cut.

• Unemployment: Unemployment is still falling. In the three months to December, the number of people out of work fell to 1.6 million, an 11-year low. Despite this, the growth of wage values has become somewhat slow, all of which could impact the timing and level of rate change.

• Wage Inflation: As I’ve just noted wages have not been rising in line with inflation and this affects consumer spending. An economic tool the Bank of England to kurb spending is to raise interest rates, I just can’t see that happening whilst wages are not rising quickly. It is this indicator that I would suggest you focus on. When wages outpace inflation for a sustained period then interest rates will rise.

Predicting whether mortgage interest rates will rise or fall is a bit like consulting a crystal ball. Things happen which change even the strongest of predictions, so it’s hard to make any firm judgement on what will happen to our interest rates in the future. However, if you want an early indicator of potential rate changes, it’s a good idea to keep an eye on these indicators, as they could give an early warning of any forthcoming change.

Should you remortgage? If you would like to discuss your current mortgage arrangements and whether or not it would be sensible to remortgage and take advantage of our current low interest rates, please give me a call. 01252 759 233 or email richard@thesurreymortgagebroker.co.uk