• Kevin Murphy

Bank of England Rules on Borrowing Rates

The Bank of England has issued its latest review of Britain’s home mortgage interest rates warning that household could expect interest rates to rise over the next 12 months thanks to higher inflation and slower wage growth.

On Wednesday in a vote of 6-2 the bank is leaving borrowing cost at an official 0.25%-an all time low for the rate. Minutes released of the meeting indicate that the rates could increase as the the current low borrowing costs cannot be sustained much longer.

Richard Sexton, director, e.surv. commented:

“If the economy were to follow a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying the August projections.”

All members agreed that any increases in Bank rate would be expected to be at a gradual pace and to a limited extent.”

He also commented:

“It’s interesting to consider that for many current mortgage holders, they have never experienced a rate rise and the impact of any payment shock is unknowable at this time.

“Low interest rates coupled with rising house prices have led to borrowers struggling to save deposits, and instead many are having to borrow larger amounts of money to get onto the housing ladder.”

The Mortgage Monitor by e.serv shows June 2017 was the fifth consecutive month that large deposit borrowers accounted for less that 35% of the total market predicting that:

“With more people taking on larger loans, an interest rate rise will be felt first in this segment of the market.”

Property Investor Today reports that Ishaan Malhi, CEO and founder of online mortgage broker Trussle,says the Bank of England’s decision on interest rates has “direct implications for every household, positive and negative”.

He followed by stating:

“For existing homeowners, sustained low interest rates are good news because they keep mortgage repayments level. In this situation, we'd recommend borrowers review their mortgage to check if they're on the right deal, should switch to a more competitive fixed rate deal, or even begin making overpayments to bring down their overall debt burden.”

“Taking the time to review your mortgage is essential, especially as an estimated two million mortgage borrowers in the UK are on Standard Variable Rates, overpaying an average of £4,900 per year compared to a market leading deal.”

“For those saving for a deposit, sustained low interest rates are bad news since their savings will continue to grow slowly. The glimmer of hope, particularly for first-time buyers, is that housing prices have begun to slow making some areas that were previously unaffordable more accessible.”

As for housing for the rest of 2017 the Bank of England has lowered its projections for the overall housing market due to inflation. The expectation is for home purchases to decline to an average 66,000 per month down from 71,000 for the remaining year and first quarter of 2018.

The Bank of England report states that weakness for the housing market has been due to some tax changes in the buy-to-let market but cited low wage growth was also contributing to a decline in the housing market.

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