Bank of England Interest rate rise getting closer

Bank of England governor Mark Carney says an increase in the base interest rate is “getting closer” but will not return to pre-crisis levels.

UK economy is beginning to “normalise” and suggested interest rates could soon follow suit. With many of the conditions for the economy to normalise now met, the point at which interest rates also begin to normalise is getting closer.

Carney added that due to a variety of economic factors, including uncertainty in the Euro area and current levels of household debt, interest rates are unlikely to rise to levels seen before the credit crisis.

The latest forecasts show that, if interest rates were to follow the path expected by markets – that is, beginning to increase by the spring and thereafter rising very gradually – inflation would settle at around 2 per cent by the end of the forecast

The committee voted last week to keep the rate at its current historic low of 0.5 per cent for the 66th consecutive month.

With the imminent interest rate rise. How many current borrowers were in the market when base rates were above 5 per cent? Many of those who are on pre-2007 rates will be vulnerable to modest rises because they are on 2.5 per cent floating rates or lower. For interest-only borrowers in this situation a 1 per cent rate rise will represent a 40 per cent increase.

Help to Buy schemes have introduced many to home ownership, accelerating a process that might have seen them not entering the market until 2015/16. It is a similar story with home movers who have upgraded a year or two early with help from the schemes. This situation is not too dissimilar to former chancellor Nigel Lawson removing tax relief for unmarried couples and giving them five months’ notice, creating a rush and establishing a false market. To this, add the Mortgage Market Review, which is making it impossible for some borrowers to move sideways, let alone upgrade, because they find they are offered lower mortgage amounts than they currently have.

Many interest-only borrowers have become mortgage prisoners, with lenders ignoring or reinterpreting FCA rules. Many are forced to switch to repayment loans when negotiating a new rate or looking to re-mortgage or move. Those not on fixed rates will be the hardest pressed when rates rise.

For more help and information please do not hesitate me.

Clare Allen @ Hoskin Mortgages