Mortgage rate rise inevitable
When I first took on a mortgage, the rate of interest was six per cent per annum. Many will remember mortgage rates as high as 18 per cent pa in the early 1980s.
To an entire generation of homeowners however such rates are unheard of and have never been within their contemplation. Many will have taken out mortgages in the current top end house market on fixed rate deals at rates of under two per cent pa, safe in the belief that rates had been at this kind of level for so long that this was where they would remain.
Currently there are economic factors in play which make me for one – now safely mortgage free – highly apprehensive for that generation. In August, the inflation rate in the UK jumped to 3.2 per cent, the highest rate since March 2012. In September, the Bank of England repeated recent warnings about the ongoing effect of rising prices and its concerns that the UK economy was not growing as quickly out of the pandemic as had been predicted.
Despite a forecast of consumer price inflation shortly reaching four per cent, no action was taken, but increases in base rates in an attempt to control inflation over the coming months seem inevitable to many.
Energy price rises are an important factor in this. Reduced competitive pressure domestically and continued price rises internationally may lead to unprecedented and sustained high price levels going forward.
The UK economy also has the largely still unknown effects of Brexit to deal with which increasingly looks to be likely to be a cause of ongoing price inflation. If so gradual increases in base rate by the Bank of England seem inevitable.
The UK base rate was reduced from 0.25 to 0.1 per cent in March 2020 to help to control the economic shock of the pandemic. It is impossible to believe that it will remain at that level much longer as base rate increases to help to control inflation come into play.
Going back to the generation of house buyers with mortgage rates of under two per cent pa an increase of base rates of that kind of magnitude could take us back to mortgage rates of five or six per cent pa. Increased rates will of course also apply to other items of domestic expenditure such as car loans, bank loans, HP and credit card repayments. Throw in spiralling energy prices and the possible impact of the Brexit factor, things start to look very tough indeed for UK households. Many people stretch to get a mortgage, while many are used to living on credit. There has to be real behaviour change as people have to be realistic when taking on a mortgage. Rates will rise and those who stretched in the first place are likely to find themselves in trouble.
Alistair Dickson is director and Head of Scotland at SKSI