Perhaps what has been surprising is that this tends to be generated by members of the MPC themselves, not least Mark Carney, who appears intent on providing ‘forward guidance’ if not the exact date when BBR will be increased off its current 0.5% level.
We have been at this rate now for well over six years and, while it’s obviously inevitable that BBR will be increased, it’s important to recognise what impact this might/or might not have for clients, especially when you’ll be dealing with purchasers/sellers who may not have known a time when it was any different. It might well come as a shock to them that BBR can be higher than 0.5% and that once it does move, there will be an inevitable climb back up probably to the 2% range over the next couple of years.
The big question everyone wants answered is of course when that first increase – likely to be 0.25% - will be. Carney has been busy suggested a ‘sooner rather than later’ approach and this appears to be looking at the end of the year/start of next, however the money markets are not so convinced and most of them appear to think a rate rise sometime during quarter two 2016 is more likely. If we have learnt anything over the last decade it is that events can conspire, and conspire quickly, meaning that ‘sure things’ are often put off.
So, what will a rate rise mean to the clients coming through your doors? Well, according to the CML, perhaps very little at least initially. Far more borrowers these days are likely to be on fixed-rate product deals, so much so that CML anticipate that half of all existing mortgage holders and a whopping 90% of new borrowers will not be impacted at all. That is until their fixed-rate deal comes to an end and they are moving to SVRs or looking for new deals.
Even at this point, it’s not really possible to say that, if BBR has gone up to 2%, then borrowers will be looking at average product rates which will also have gone up by 1.5%. Mortgage funding and pricing simply doesn’t work like this – many lenders secure their funding from the capital markets and BBR has no influence on the cost of these funds or the subsequent pricing. Also, it’s important to recognise that in rising BBR environments while SVRs and variable rates, of course BBR-trackers, tend to go up by the amount BBR has gone up, lenders are at liberty to increase by less or more. We will all remember the pre-Credit Crunch pricing when there were hundreds of deals available below BBR – this will certainly be the case again when we reach a period of normality.
So, while for some borrowers an increase in BBR will bring about an immediate increase in their monthly mortgage payment, for others there will be no impact at all. The other positive in this, is that the Bank of England anticipate a ‘new normal’ when it comes to the future long-term level of BBR. Again, pre-Credit Crunch we were looking at a ‘normal’ of 5%, however the anticipation is that BBR will increase, but slowly, and it will probably find its new normal at 2/2.5%. There is a very important balancing act here for the MPC because at no point does it want to impact any economic recovery by raising rates too fast and too soon – this would be disastrous, so a more cautious approach is highly likely.
For your clients therefore it means there is no cause for panic and you should convey this point clearly to them. Rates are not about to rocket anytime soon, lenders’ appetites are still relatively strong, and if they can meet the affordability measures and have a good credit record then there will always be highly competitive deals to access. BBR will move up, without doubt, but historically we are living through an age of very low rates, and therefore keenly-priced loans are still there for the taking.
