This week we have had a rash of data starting with inflation rising in April for the first time in ten months, with once again inflation rising faster than wages. In addition London house prices are now 25% percent above the 2008 peak and it is estimated that house prices across the country are rising at more than 10% annum. However according to the organisation for Economic Co-operation and Development (OECD) house prices in Britain are 30% too high, based around typical wages and the long term average house price.
The Bank of England is becoming increasingly aware of the possibility of a housing bubble forming with people borrowing higher and higher income multiples. In my opinion they have used the Mortgage Market Review to slow the market down without raising interest rates by making borrowing more difficult. Then Lloyds Bank, who are 24.9% owned by the taxpayer, have taken radical action not to approve mortgages of over £500,000 when borrowers are borrowing more than four times income. Lloyds’ clampdown on risky mortgages is expected to be adopted by other lenders, as data from the Council of Mortgage lenders show mortgage lending at 16.6 million for April 2014, as opposed to 12.2 billion in April 2013.
I am now getting the impression that in parts of the country in the last year or so we have been in the grip of a housing boom, and there is lots of evidence as mentioned above that illustrates this. Unfortunately even though our economy is showing signs of recovery it is not translating through in real wage rises. This means for many without help from the family, house prices are stretching people to the point of either unaffordablilty, or getting onto the housing ladder for some could be a blessing in disguise if interest rates rise. It has been estimated by the Resolution Foundation that more than 2 million of Britain’s 8.4 million mortgages will face unaffordable payments if the base rate rises to 3% by 2018 as the market expects. It will mean that this group will be spending more than a third of their post tax income as opposed to the current 13% figure. This more than doubling of rates will leave the average household more than £4, 400 per year worse off on a £100,000 mortgage according to the Foundation.
We have now had ultra low interest rates for the last five years. I could not have imagined that rates will go so low for so long. Some borrowers have managed to get through 20% of a typical mortgage term without seeing rates rising from the level last seen in 1694. So you could say that perhaps we are becoming complacent and rates when they rise could be a shock for many of us, and in particular the newer borrowers. It is clear the housing market, the economy and inflation are now moving upwards, and although The Bank of England is pulling other levers to dampen demand, in my opinion interest rates rise are not far away. I would therefore advise that for the people where significant rates rise would be a problem to take action now and fix your rate. By doing this you may inflict short term pain as you may end up paying more than you are now for a typical five year fixed rate but you won’t see any more rises until 2019, and who knows what the next five years will bring. Also, it is worth mentioning that with many five year deals it costs very little to book the rate, and you often do not need to take it up for 3 months after the offer has been made. So in the unlikely event of the pressure for rate rises subsides, you can let the offer lapse and carry on with your old deal.
Kieron Bassett Financial Services has two Independent Financial Advisers who specialise in mortgages, general insurance and investment advice. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit www.kieronbassett.com.
Kieron Bassett DipPFS
26th May 2014
“