Feature: Base rate mania

The base rate is looking likely to increase at least twice before Brexit (March 2019) and the earliest rise is predicted to be May this year.

Mortgage Advice Bureau head of lending Brian Murphy says: “Many forecasters were predicting base rates returning to more normalised levels, but ten years after the onset of the crisis we are still at 0.5%, the ultra-low level deemed to be necessary by the Bank of England to allow the UK economy to recover.”

The probability of the base rate increasing multiple times within the next few years is a common theme across the mortgage sector in particular, with many experts expecting at least two increases before March 2019, resulting in borrowers having to allocate additional funds to service their mortgage costs. Although most homeowners are likely to feel the effects of a rising base rate, first-time buyers and those coming towards the end of their fixed-term period are expected to endure a harsher financial burden, as monthly payments increase along with interest rates.

As a precaution and to ensure that potential buyers are making the best and financially viable decisions, The Mortgage Genie director Matt Stevens recommends that “anyone with, or anyone planning to take out a mortgage, should seek professional help to ensure their mortgage debt is structured correctly and is affordable”.

However, Stevens also comments that a rising base rate doesn’t have to necessarily “spark” fear or volatility. This is further supported by Mortgage Advice Bureau head of lending Brian Murphy, who states that an increase in base rate is unlikely to have any “material impact” on the activity levels currently taking place in the UK housing and mortgage markets, as lenders want to achieve the same results as those seen in 2017, with some lenders looking to lend substantially more.

“Mortgage rates for new borrowers are and remain close to all time low levels and competition amongst mortgage lenders remains intense,” Murphy says.

Despite the potential struggle that first-time buyers will encounter following an increase in base rate, many experts are surprised that the BoE has not raised rates sooner as CPI is stubbornly above the UK’s target of 2 per cent. Murphy further explains that policy makers remain “extremely cautious” in terms of making changes to monetary policy for the “fear” of slowing economic growth further. This a particular matter of concern since the UK has transformed from the quickest growing G7 economy to the slowest in under two years, whilst average wage levels have not endured the same level of growth.

However, whereas Murphy believes that an increase in base rate will “unlikely” have a material impact on the activity levels in the mortgage market, he states that the forthcoming increase will “mobilise” borrowers, particularly those coming towards the end of their fixed-term period.

“I'd expect another base rate rise to mobilise any current borrowers who may be coming to the end of their current fixed-term period, or are already on a SVR, discount, or tracker rate. If they haven't previously considered remortgaging thanks to the previous rate rise in 2017, there's a good chance that these new increases will spark them into action.”

Reluctant prospective buyers may also be spurred to take out a mortgage sooner than planned, with the idea of lower interest rates attracting first-time buyers, who may also benefit from a “sizeable discount” on the asking price of potential properties. Garrington Property Finder managing director Jonathan Hopper says: “The calls for an interest rate rise will soon turn to a clamour, and in the short term this is likely to spur wavering would-be buyers into action.

“An increase in the cost of borrowing will inevitably trim demand, but for now those who are in a position to buy are making hay – with many asking for, and securing, sizeable discounts on asking price.”

Traditionally, rising interest rates would result in lower property prices, but many experts believe that this is not going to be the case this time round. According to Colliers International head of UK residential Ashley Osborne, many buyers have been pricing with the “expectation” that interest rates will rise, whilst many borrowers are also fixing their mortgages for longer terms, with five-year products substantially growing in popularity.

Furthermore, the first increase is forecast to be 0.25 per cent, bringing base rate to 0.75 per cent which would equal an additional £21 per month for property owners with a £150,000 mortgage.

Commenting on the rumoured increase, Murphy states that: “With all mortgages arranged since the introduction of the Mortgage Market Review (MMR) having been stress tested to determine affordability in the event of increasing mortgage rates, most borrowers should be capable of absorbing any increase in bank base rate this year and in the next few years should they occur.”

However, whilst this may not seem like a hefty increase initially, BoE policymaker Gertjan Vlieghe has warned that the UK is likely to see “one or two” interest rate rises each year up to March 2021, pushing the base rate to 2%. The predicted increase would see that additional £21 per month more than doubled, resulting in homeowners paying an extra £50 plus on a £150,000 mortgage.

If the increase were to take place, as is expected, affordability may become a challenge for many borrowers, particularly for those who have bought a property following the introduction of the mortgage market review (MMR) in April 2014, which assess a borrowers’ ability to repay their mortgage now, and in the future.

Society of Mortgage Professionals operations manager Vishal Pandya however, states that this assessment doesn’t ensure that borrowers can afford their repayments on a longer-term basis, because if a mortgage is fixed for at least a five-year period, the pay rate can be used as the stress rate. Following this method allows lenders to use a much lower rate to stress test, which does not provide a true reflection of how the borrower would cope with a rising base rate.

Further commenting on the impact, Pandya states: “Regardless of how matters unfold, consumers clearly need to be aware of the prospect of more expensive rates and what it means for their individual circumstances. The mortgage market review (MMR) goes some way to alleviate concerns due to lender stress testing, but the public need to be prevented from becoming complacent after seven consecutive years or record low rates.”

Pandya also draws attention to recent research which reveals that 47% of people lied on their mortgage application in order to get it approved. This finding begs the question on whether those who did lie on their mortgage application, almost half of the population, would be able to afford their repayments if base rate did increase to the levels forecast by Vlieghe.

If the base rate were to increase to the levels predicted by Vlieghe, Copland would be “interested” to see whether the regulators would ask lenders to reduce their stress test upper limit.

Copland sees one of the pertinent challenges lying with the upper limits involved in lenders’ stress tests, as the current affordability rules will “make lending difficult” if wage inflation does not rise at a similar rate, which in turn will put additional unwanted pressure on the mortgage market.

Monetary Policy Committee (MPC) members Ian McCafferty and Michael Saunders displayed concern as it was recently announced that base rate will remain at 0.5%. They fear that whilst interest rates remain so low, the UK is in danger of facing interest rate hikes faster and further in the future.

Buy-to-Let (B2L) mortgages already experience significantly higher rates and UOWN head of growth Sam Davies states that landlords have been “under attack” by the government in the last year, whilst a base rate increase could lead to many properties potentially making losses.

“If this is the case, they may decide to disinvest and move their money into property crowdfunding platforms that are able to give them returns with less hassle and with no exposure to mortgage interest rate hikes,” Davies comments.

Overall, many experts are of the consensus that the base rate will increase more than once over the coming months and years, with first-time buyers feeling the impact of the increased financial pressure more so.

However, existing homeowners with a long-term fixed rate may also experience an initial shock when coming towards the end of their fixed-term, and those on a variable rate will also have to allocate additional capital in order to service their mortgage repayments. While landlords looking to take out further B2L mortgages may encounter exceedingly high interest rates, potentially pushing them away from the B2L market and drawing them towards property crowdfunding platforms.

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