Here Alpa Bhakta, CEO of Butterfield Mortgages Limited, explains what factors and characteristics brokers and borrowers need to be on the look out for when selecting a lender. As part of the feature, she'll also delve into how the rise of challenger banks has affected the prime property and mortgage markets.
Between 2016 and 2018, as many as 4,214 new products were introduced into the residential mortgage market. It’s a remarkable statistic, and one that reflects the broadening range of options available to homebuyers.
Today, mortgage lenders have larger product portfolios, with subtle variations in their terms and rates meaning they provide multiple iterations of what is fundamentally the same offering. At the same time, the rise of “challenger banks” means there are more and more new players entering the industry, in turn giving borrowers entirely new companies to approach.
One would naturally assume this is a positive trend, something to be welcomed and celebrated. However, in truth, despite the increase in the number of mortgage products available to consumers and investors, challenges still remain.
As with any market that expands steadily over a long period, the wealth of options to choose from can prove overwhelming. Indeed, filtering through thousands of potential mortgages to find the best product from the right lender is perhaps more difficult than ever.
Earlier this year, Butterfield Mortgages Limited carried out an interesting piece of research delving into the UK’s mortgage market––or more specifically, the UK’s high net-worth (HNW) mortgage market––to establish borrowers’ opinions of the products available.
The independent survey of more than 500 HNW individuals revealed that even for the wealthiest members of society, there are still significant barriers to securing a mortgage. For example, one in nine said they had been turned down for a mortgage in the past decade.
Furthermore, 79% said they think too many lenders are currently employing overly restrictive “tick box” methods when assessing mortgage applications; 60% believe it is becoming increasingly difficult to secure a mortgage for a non-primary residential purchase; and 67% of UK HNWs feel banks do not adequately cater to the needs of property investors and buy-to-let landlords.
The results illustrate how the wealth of options available to mortgage applicants is not always a good thing. In fact, it means there are more unsuitable products and lenders that a borrower must filter though.
Enter the intermediaries. Brokers and wealth advisers have a more important role than ever in guiding their clients, such as HNWs, towards the best and most appropriate mortgage products. Indeed, the aforementioned BML research showed how 73% of HNWs rely on brokers to help them find mortgages.
The larger the mortgage market becomes, the more valuable expert help will be in connecting borrowers to suitable lenders and products.
It’s nearing three years since the EU referendum, and as if anyone needed reminding, Brexit has dominated political and economic discourse throughout this period. In a word, the result of the on-going Brexit saga has been uncertainty.
A lack of clarity regarding what the UK’s financial and political future will look like has resulted in hesitancy among consumers, investors and businesses alike. In the mortgage market, this means further due diligence is required from borrowers and brokers to ensure they work with lenders who are not at risk of succumbing to the challenging conditions currently gripping the market.
Over recent months the likes of Secure Trust Bank, Amicus Finance and Fleet Mortgages have withdrawn from the lending market or frozen their activities. As FT Adviser reported in January, the combination of Brexit and increased competition has forced some companies out of the market, while other lenders are pulling out of deals at the last minute.
One of a borrower’s greatest fears is that he or she will choose a mortgage lender who enters financial difficulties and this, in turn, has the potential to compromise their own finances. To avoid this, one must establish the relative security of different lenders based on the strength and longevity of their funding lines, as well as their past track-record of weathering turbulent periods, such as the 2008 global economic crisis.
The number of products and lenders in the mortgage market is on the rise. Meanwhile, Brexit uncertainty has presented new challenges to both traditional and challenger lenders. Consequently, selecting the right mortgage from the right provider requires more due diligence than ever.
After all, there are specialist lenders with expertise in providing bespoke mortgages for even the most niche borrowers in the most unique situations. Finding them may take work, but ultimately the health of the mortgage market reflects the ever-present demand among both domestic and international buyers for bricks and mortar assets here in the UK, and this certainly is something to celebrate.
The most obvious example of this is the criteria you need to meet in order to get a mortgage. Although there are certain assumed standards, each lender has its own criteria. As a consumer, that leaves you in a precarious position of shooting in the dark when submitting mortgage applications.
Things don’t get any better when you look at the data surrounding mortgage rates. Although all stats can be twisted to suit a specific agenda, there are times when consumers won’t know what to believe. For example, if you compare the headlines from the Financial Times and UK Finance in May 2019, both had a different take on the current lending status.
While lobbying group UK Finance focused on approval rates being up by 6% year-on-year and 2% between February and March, the Financial Times had a different spin. For reporter Imogen Tew, the Bank of England’s Money and Credit report stood out because approvals had dropped by 4.5% between February and March. Even comparing just two news stories, you can see how the market is confusing at times.
Fortunately, as it often does, technology is capable of cutting through the unnecessary and picking out the relevant. On a basic level, mortgage calculators are an easy way for prospective borrowers to see how much they can get. However, with these calculators using generic data and broad assumptions, the answers are nothing more than a guide. Building on this technology, mortgage brokers offer sophisticated calculators that help determine the best products for a single user.
Using AI-style technology, free-to-use online mortgage broker Trussle matches borrowers and lenders. Unlike generic calculators, the software compares personal details against 12,000 mortgage deals. From there, daily market comparisons are carried out to ensure the user is given recommendations that are based on the latest market conditions. Indeed, it’s this dynamism that counters the complex and volatile nature of the mortgage industry. While it may not necessarily make mortgages any less complex, using tools like this can help simplify the application process.
In conjunction with a desire in recent years to streamline the industry, developers have also adjusted their focus to lender technology. Indeed, as the market has become more competitive, lenders with the most user-friendly systems are likely to win favour with the general public. Latching onto this trend, Fiserv launched Mortgage Momentum in February 2019. Described as an “end-to-end” system, Mortgage Momentum is designed to improve the lending experience.
Part of the software’s appeal is that it makes the lending process easier: by simplifying the overall process, the product is able to make borrowing more attractive. In other words, by making it easier for consumers, the lender has the ability to generate more business. What’s more, the product also uses machine learning to understand the market’s shifting dynamics. Using these insights, lenders can refine their products to meet the latest economic and consumer demands.
Mortgages will never be an easy topic to master. Changing interest rates, market forces and economic stability will always ensure a level of uncertainty. However, with modern technology, things are easier to grasp than they’ve been before. Indeed, thanks to calculators, brokers and advanced lending software, borrowers are shooting at slightly lighter targets than they once were.
Butterfield Mortgages Limited (BML) has commissioned an independent survey among more than 500 high net-worth (HNW) individuals to uncover the difficulties they face when applying for credit.
HNW individuals are struggling to secure credit from high street banks, new research from BML has revealed.
The prime property mortgage provider surveyed more than 500 HNWs––all with a net worth over £1 million––about their experiences of securing finance from banks. It found that as many as 12% of the wealthy individuals quizzed have been rejected for mortgages in the past decade.
BML’s study revealed that 79% of HNWs find the process of applying for a mortgage with a bank too rigid, saying they apply “tick box” methods that fail to recognise unique personal circumstances.
Complicated financial profiles are one of the main challenges for HNWs when securing credit, with their wealth often invested into property or illiquid assets. Indeed, 44% said they have found it inherently difficult to access credit because their capital is tied up in existing real estate investments, while 38% struggle to get mortgages from banks because they do not have standard monthly paycheques.
Furthermore, 60% believe it is becoming increasingly difficult to secure a mortgage for a non-primary residential purchase. In response, two in three (67%) UK HNWs have lost confidence in high street banks, feeling they do not cater to the needs of property investors and buy-to-let landlords.
To overcome these challenges, the vast majority (73%) of wealthy individuals rely on brokers to help them find the lenders that cater to their needs.
Alpa Bhakta, CEO at BML, commented on the findings: “It may come as a surprise that of all the demographics, the UK’s wealthiest people often find themselves at an immediate disadvantage when it comes to applying for credit from banks; be it mortgages or credit cards.
“In reality, the rigid “tick box” methods applied by many conventional lenders are not compatible with HNWs’ unique and often complicated financial profiles. To overcome these challenges HNWs need to seek out brokers or lenders who can commit the necessary time and expertise to understand their situation and, in turn, deliver mortgages that meet their specific needs.”
(Source: Butterfield Mortgages Limited)
With the 10th anniversary of the Lehman Brothers’ shocking and unprecedented bankruptcy this month, Katina Hristova looks back at the impact the collapse has had and the things that have changed over the last decade.
Saturday 15 September 2018 marked ten years since the US investment bank Lehman Brothers collapsed, sending shockwaves across the financial world, prompting a fall in the Dow Jones and FTSE 100 of 4% and sending global markets into meltdown. It still ranks as the largest bankruptcy in US history. Economists compare the stock market crash to the dotcom bubble and the shock of Black Friday 1987. The fall of Lehman Brothers was a pivotal moment in the global financial crisis that followed. And even though it’s been an entire decade since that dark day when it looked like the whole financial system was at risk, the aftershocks of the financial crisis of 2008 are still rumbling ten years later - economic activity in most of the 24 countries that ended up falling victim to banking crises has still not returned to trend. The 10th anniversary of the Wall Street titan’s collapse provides us with an opportunity to summarise the response to the crisis over the past decade and delve into what has changed and what still needs to.
As we all remember, Lehman Brothers’ fall triggered a broader run on the financial system, leading to a systematic crisis. A study from the Federal Reserve Bank of San Francisco has estimated that the average American will lose $70,000 in lifetime income due to the crisis. Christine Lagarde writes on the IMF blog that to this day, governments continue to ‘feel the pinch’, as public debt in advanced economies has risen by more than 30 percentage points of GDP – ‘partly due to economic weakness, partly due to efforts to stimulate the economy, and partly due to bailing out failing banks’.
Afraid of the increase in systemic risk, policymakers responded to the crisis through quantitative easing and lowering interest rates. On the one hand, quantitative easing’s impact has seen an increase in asset prices, which has ultimately resulted in the continuation of the old adage, the rich get richer and the poor get poorer. The result of Lehman’s shocking failure was the establishment of a pattern of bailouts for the wealthy propped up by austerity for the masses, leading to socio-economic upheavals on a scale not seen for decades. As Ghulam Sorwar, Professor in Finance at the University of Salford Business School points out, growth has been modest and salaries have not kept with inflation, so put simply, despite almost full employment, the majority of us, the ordinary people, are worse off ten years after the fall of Lehman Brothers.
Lowering interest rates on loans on the other hand meant that borrowing money became cheaper for both individuals and nations, with Argentina and Turkey’s struggles being the brightest examples of this move’s consequences. Turkey’s Lira has recently collapsed by almost 50%, which has resulted in currency outflow and a number of cancelled projects, whilst Argentina keeps returning for more and more loans from IMF.
Discussing the things that we still struggle with, Christine Lagarde continues: “Too many banks, especially in Europe, remain weak. Bank capital should probably go up further. 'Too-big-to-fail' remains a problem as banks grow in size and complexity. There has still not been enough progress on how to resolve failing banks, especially across borders. A lot of the murkier activities are moving toward the shadow banking sector. On top of this, continued financial innovation—including from high frequency trading and FinTech—adds to financial stability challenges. In addition, and perhaps most worryingly of all, policymakers are facing substantial pressure from industry to roll back post-crisis regulations.”
The Keynesian renaissance following that fateful September day, often credited for stabilising a fractured global economy on its knees, appears to have slowly ebbed away leaving a financial system that remains vulnerable: an entrenched battalion shoring up its position, waiting for the same directional waves of attack from a dormant enemy, all the while ignoring the movements on its flanks.
If you look more closely, the regulations that politicians and regulators have been working on since the crash are missing one important lesson that Lehman Brothers’ fall and the financial crisis should have taught us. Coming up with 50,000 new regulations to strengthen the financial services market and make banks safer is great, however, it seems that policymakers are still too consumed by the previous crash that they’re not doing anything to prepare for softening the blow of a potential new one. They have been spending a lot of time dealing with higher bank capital requirements instead of looking into protecting the financial services sector from the failure of an individual bank. Banks and businesses will always fail – this is how capitalism works and no one knows if there’ll come a time when we’ll manage to resolve this. Thus, we need to ensure that when another bank collapses, we’ll be more prepared for it. As Mark Littlewood, Director General of the Institute of Economic Affairs, suggests: “policymakers need to be putting in place a regulatory environment that means that when these inevitable bank failures occur, they can fail safely”.
In the future, we may witness the bankruptcy of another major financial institution, we may even witness another financial crisis – perhaps in a different form. However, we need to take as much as we can from Lehman Brothers’ collapse and not limit our actions to coming up with tens of thousands of new regulations targeted at the same problem. We shouldn’t allow for a single bank’s failure to lead us into another global crisis ever again.
With the recent interest rate rise, from mortgages to savings, the public is still awaiting movement in the financial sphere. Below Paul Richards, Chairman of Insignis Cash Solutions, explains to Finance Monthly what 2018 holds for savers.
The Bank of England November rate rise has triggered a waiting game among banks. The government’s move to extend the rise to NS&I savers puts more pressure on competitors to do the same, but savers have still only seen the full benefit with a handful of banks. Most banks are still waiting to see what competitors do, or passing on only a fraction of the rise.
Some economic commentators point to two further interest rate rises in 2018, but protracted Brexit negotiations could delay this. If the Bank of England hikes rates again, it will once more be the government’s decision on NS&I rates that influences whether other banks will follow.
No savings provider wants to pay more interest than they need to, as it has a direct impact on their profitability. Margins have been compressed heavily since the global finance crisis and banks don’t want to see them fall further. Challengers are more hungry to grow their balance sheets via retail deposits, so we’ll likely continue to see better rates from these players than the traditional larger banks.
February 2018 will see the end of the £100 billion term funding scheme, a source of cheap borrowing for banks. Once this scheme is closed, appetite for retail deposits will increase, prompting more competitive rates in the market. Longer term the impact will be even more significant, banks have four years to repay money to the scheme, and will need to rely on retail deposits for some of these funds.
For several years a large amount of banks’ budgets and human resources have been dedicated to managing regulatory change. This drain has likely prompted unintended consequences for consumers; if banks hadn’t had to spend so much money on implementing new regulation, would we have seen the same level of branch closures?
But there are huge benefits from regulation, driving increased consumer protection and access to better deals. Open Banking and PSD2 are the most interesting areas to watch - both open up, with consumer consent, bank transaction data to power new financial tools. These will help people better manage their money and access the right deals for them. A wide range of fintechs across the UK, including Insignis, are working hard to develop new solutions and over time consumers will feel a real benefit to their day-to-day lives.
Some banks are further advanced with their Open Banking plans than others, and there are challenges to grapple in terms of data management and security; however, there’s no question that 2018 will be a year of huge advances that give consumers more control over how they manage their money.
Today reports indicate the FTSE closed on a record high yesterday, outperforming its already high record from Friday last week, following the Bank of England’s anticipated decision to raise interest rates from 0.25 to 0.5% last week.
The truth is, this changes a lot, from mortgages to bonds. Below Finance Monthly hears from many sources on Your Thoughts, how consumers should behave, how banking may evolve, how profits can change, what might happen to the pound in weeks to come and so forth.
Anthony Morrow, Co-Founder, evestor.co.uk:
In theory, the rise in the interest base rate should mean that consumers get higher interest rates on their savings. However, people shouldn’t get too excited about this. It often takes many months for the changes to be felt in savings accounts, and even then, the increases in savings rates can be marginal and may take years to build into noticeable rates of anything over 3%.
Consumers should also consider that the increase in base rate still means that their cash savings are playing catch-up. The past decade of interest-rate squeezes has meant that the value of cash savings have dropped instead of increasing in value.
The best course of action is for consumers to spread their savings and investments, and to look for alternatives to the traditional high street savings accounts and cash ISAs. It’s now easier than ever for consumers to invest money via the internet in stocks, shares and global investment funds that could generate average returns of between 5% - 7%. The key thing though is to ensure people get advice about what to do with their money before they part with their cash – this isn’t always readily available – and to check any charges that they’re likely to incur for making investments. In some cases, excessive fees can eat massively into the investment returns, sometimes by as much as half.
Gianluca Corradi, Head of Banking, Simon-Kucher:
Investors with shares in UK banks can cheer as the rate increase will boost the operating profits in the retail banking industry by £274 million over the next 12 months. This 3.1% increase in the operating profit of the banks will be positive news for the shareholders as the U.K. banks have had their profitability squeezed in a low rate environment despite numerous cost cuts and efficiency increase measures.
The gain for shareholders is expected to come as banks increase the lending rates immediately but deposit rates only gradually and by a lower amount. We can expect the banks to immediately increase the interest charged on new loans and those on variable rates by the full 25 basis points (bps), giving a boost of about £1.26 billion in their interest income for the coming year. Concurrently, the interest expense on deposits is likely to rise by just under £1 billion as the rates for savers rise over time.
Consumers can expect modest returns on their deposits as rates, though higher, will still be low in absolute terms. For instance, a saver who manages to get the entire 25bps increase on £10,000 of deposits, would stand to make an additional £25 over a year.
Paresh Raja, CEO, MFS:
In light of rising inflation and stagnating economic growth, the decision to increase interest rates for the first time in a decade comes as no surprise. Nevertheless, it is important to note that the rise in interest rates will place an added financial pressure on first-time buyers and buy-to-let investors needing to borrow money. While the impact on the UK property market may not be immediately obvious, there is no question that this month’s upcoming Autumn Budget now takes on greater significance as it must find ways of alleviating stress and providing support for property buyers. With the interest rate now sitting at 0.5%, this is a prime opportunity for the Government to address issues like real estate demand and Stamp Duty to ensure the market remains buoyant and readily accessible for homebuyers and investors alike.
Angus Dent, CEO, ArchOver:
This rate rise of 0.25% is largely symbolic. At the same time, it’s also a year too late. Dropping the interest rate below 0.5% was the wrong decision in the first place. The Bank should have pushed rates up to 0.75% as a show of strength that would have driven inflation down as the pound rose.
Although this rise is unlikely to have any major material effects, it is a return to the trajectory we should have been on for the past year, and a good sign for a bolder policy. For many, the move towards a higher interest rate will simply mean business as usual.
Following the financial crash, there is a hunger to make up for ten lost years and UK savers and investors are finally waking up to the realisation that they need to chase higher returns. With interest rates remaining below 1%, this means looking for opportunities to branch out beyond traditional vehicles and introduce greater diversity into portfolios to secure a higher yield.
Emmanuel Lumineau, CEO, BrickVest:
This announcement is momentous for the UK economy and should signal the start of a series of gradual increases. The Bank of England has decided that inflation is potentially getting out of control and the economy now requires higher borrowing costs. The decision also signals that the UK economy has not performed as weakly as the Bank predicted last year.
Increasing interest rates has a direct impact on real estate. Higher interest rates and rising inflation make borrowing and construction more expensive for owners, which can have a constraining effect on the market but can also lead to an increase in property prices. There has certainly been an abundance of international capital flowing into real estate, almost every major institutional investor globally has been increasing their portfolio allocation to real estate over the last five years mainly because of lack of alternatives.
We continue to see the highest level of volatility from the office sector as many international firms currently headquartered in the UK put decisions on hold over their long-term office space requirements. If the UK no longer gives businesses access to the European market, they may need to spread their staff across multiple locations to more efficiently access both the UK and European market. Indeed our recent research showed that 34% of institutional investors believe the biggest real estate investment opportunities will be found in the office sector and the same number in the hotel & hospitality industry over the next 12 months.
Uma Rajah, CEO, CapitalRise:
The Bank of England’s decision to raise its base rate of interest from 0.25% to 0.5% might superficially look like good news for savers, who have had to live with near non-existent returns on their deposits for some time. But in reality it is highly unlikely that banks will actually pass on much — if any — of the rate rise to their customers. It’s more likely they will act to increase their margins, focusing on improving their own profitability rather than doing what’s best for customers. Savers should take note and look for alternative, more lucrative, ways to grow their pot with minimal additional risk. While the base rate will continue to rise over the next 12 to 18 months, it could be some time before banks pass on the benefits.
Meanwhile, the rate rise is bad news for property developers and borrowers that are using banks to finance their loans. Banks charge based on a margin to LIBOR, which will go up in line with the base rate rises. Combine this with other longstanding challenges in securing finance from banks for real estate projects in the current climate, and property borrowers will be much better off looking at more innovative sources that can deliver finance more quickly and offer better value — particularly if the rate continues to rise over the next 12 to 18 months.
James Bentley, Trader, Learn to Trade:
Following the Bank of England’s announcement that interest rates are rising by 0.25%, the British central bank will hike borrowing costs for the first time in more than 10 years due to the recent surge in inflation.
Many economists have warned that the time is not right for a hike as recent data has painted a subdued picture of the economy while uncertainty over how Britain's withdrawal from the European Union will play out remains. With Brexit negotiations still underway, British consumers should prepare themselves for further fluctuations to interest rates over the next year.
The pound has pushed higher against the dollar in early trade, while London's FTSE100 searched for direction ahead of the announcement. Although the announcement has created uncertainty, we expect inflation to drop to 2.2% by 2020 - where the rate will stagnate and hold for a period of time.
Paul Davies, Director, Menzies LLP:
Even though the rate rise was well signposted by Mark Carney, it will bring hardship for businesses that rely on consumer spending.
Consumers are always wary of a rise in interest rates and we may see the retail industry experiencing a bumpy ride as UK shoppers tighten their purse strings. Businesses can defend against the effects of turbulence by ensuring cash management is a top priority, managing creditor payments and adapting to changes across the supply chain.
Consumers and businesses will be hoping that after the announcement, any further interest rate rises will be staved off until well into the New Year.
Mihir Kapadia, CEO and Founder, Sun Global Investments:
The Bank of England has given in to the rising inflation, which has been above their 2% target and peaking at 3%, by raising interest rates for the first time in a decade. While the interest rate hike bodes well to support the pound, it also increases the borrowing costs for consumers and business. It will mean an increased squeeze on consumers with loans and mortgages, thus nipping their spending and in turn affect the economy. It may well turn out to be a vicious loop, especially as Brexit woes continue to weigh down on the UK’s economy.
The last the time the Bank of England had increased the interest rates was in July 2007, when it pushed the cost of borrowing to 5.75% months before cutting them during the onset of the financial crash of 2008. This increase comes at a time when the economic framework has stabilised and careful credit scrutiny is in place to prevent another crash. The interest rate hike may well deter consumers from accessing cheap credit, which will bode well for the financial watchdogs.
The next interest rate hike may well take a while, until further clarity emerges on Brexit’s impact on the UK economy. Until then 0.5% is the only sword to battle 3% inflation, and curtail it from strengthening any further.
Frazer Fearnhead, Founder and CEO, The House Crowd:
I sincerely hope all the banks will have given as much thought and effort to increasing interest rates for investors as they will have given to helping people maintain their mortgage repayments and loan agreements”. He added “For the past decade investors have been forgotten and suffered derisory levels of returns on their savings. So, it is crucial that banks, increase interest rates on savings just as quickly as they increase interest charges to borrowers.
Gregg Davies, Company Director, IMA Financial Solutions:
We all talk about the winners and losers when Bank of England interest rates are mentioned. Of course, if you have savings on deposit in variable rate accounts, or a variable rate mortgage you could be affected directly.
Many are asking, will the rate rise make my mortgage more expensive? Most mortgage lenders offer fixed or variable rate mortgages, and many have already adjusted their fixed rate deals ahead of the speculation over an interest rate rise. Variable rates are either based on a lender’s own set variable rate or linked directly to the Bank of England – called trackers.
We have now had nearly eight years of unprecedently low rates - for a generation of first time buyers, low interest rates are all they have known.
Mortgage holders have taken the low rates on board, and today it is estimated that over 70% of mortgages are fixed rate deals – compared with a low of under 40% in 2001. On a day to day basis this is reflected in my own clients’ decisions.
Rob Douglas, VP of United Kingdom and Ireland, Adaptive Insights:
For many businesses across the UK, the rise in interest rates and subsequent fall of the pound will require action. Companies are operating in the midst of a volatile market, where the sterling went from being at its strongest since the Brexit vote, to taking an immediate tumble after the rise in interest rates was announced. This market instability can upend budgeting and forecasting, making it difficult for finance and management teams to devise an accurate financial plan and make business-critical decisions.
Economic and market volatility require businesses to be as agile and adaptable as possible to ensure their financial planning models reflect changing assumptions and conditions. To do this, companies must plan in real-time, with current data from across the organisation, so that they can mitigate potentially damaging consequences, such as a negative impact on profit margins. What’s more, businesses should prepare to be more responsive by running ‘what if’ scenarios in advance that will, for example, reveal the impact the rise in interest rates could have on their business, allowing them to make better, faster decisions.
Ultimately, it is the companies with sound financial planning processes in place that will have a better chance at success when volatility strikes.
Johan Rewilak, Economics Expert, Aston Business School:
Since the crisis of 2007, interest rates have been at record lows, and whilst this hike has only moved them back to pre-Brexit levels, the larger worry is about any future potential rises.
Since the decision has been made, Mark Carney and the MPC have already faced lengthy criticism about how the rate hike will impact the economy. There are those who believe recession is around the corner and that there was a desperate need to maintain interest rates at the 0.25% level to prevent this.
Those advocating the rise have done so by optimistically looking at data that shows unemployment has fallen to levels unseen since the 1970s and that the rate of underemployment (those working part-time who wish to work longer hours) has dropped. Nevertheless, wage growth (a metric of longer term inflation) has remained subdued.
My concern is and will be surrounding financial stability. Household indebtedness and mortgage to income ratios are at troublesome levels and any hikes in interest rates mean higher repayments. If the interest rate hikes lead to recession, this will only magnify these issues and have cataclysmic effects on the financial system as it did in 2007. Whilst, higher rates may put people off from future borrowing, there is a tricky trade-off surrounding those already highly indebted.
The upshot of this rate rise is that at least Mark Carney has two rolls of the dice if Brexit negotiations or the economy starts to sour before negative interest rates become a possibility. That being said, why would anyone raise interest rates that may create a recession just so they have the ability to lower interest rates and to try cure the problem
John William Gunn, Executive Chairman, SynerGIS Capital PLC:
This was widely anticipated by the wholesale markets following the language of the MPC’s September statement. The main question mark was over any Brexit-related outlook uncertainty. As the market had been positioned for this rise a failure to follow through could have caused the MPC credibility issues and sparked yet more speculation around Brexit headwinds to the economy.
For the general public, the good news is that more people are on fixed rate mortgages than ever so the effects for homeowners should be subdued. More people are renting and many households are lucky enough to be mortgage-free. As mentioned in the MPC statement, debt servicing costs paid by British households would remain "historically very low" despite this hike.
It’s not so great for first time homebuyers (many mortgage deals were withdrawn in anticipation of the BoE’s move) but attention now turns to whether the Chancellor can offer any stamp-duty concessions in the Budget on 22nd November.
It's good news for neglected savers and the retired. While still low, retirees shopping around for annuities should already be seeing improved rates. Not all high street banks will be passing this rate rise onto their savers. Some committed ahead of the decision but they were in the minority.
As with the FOMC (the Federal Open Market Committee = equivalent of the MPC) in the US, the first interest rise is psychologically important, as it reminds borrowers that base rates for the last 10 years are not at “normal” levels. It should not be forgotten that for the U.K this is just a reversal of the post-Brexit-result emergency cut in Aug 2016. Any pre-Christmas consumer sentiment change may affect spending at high street retailers who have had mixed trading results recently. As with the U.S central bank guidance, we expect any rate rises over the coming years to be on a slow and gradual basis.
Given the modest growth forecasts issued by the MPC and their expectation that inflation with peak at 3.2% in the October CPI release, we do not anticipate any further tightening from the MPC until Q3 2018. The Brexit influence is unlikely to go away soon, as noted by the MPC in their statement.
Duncan Donald, CEO and Head of Trading, London Academy of Trading:
Last week we saw the UK MPC and Mark Carney deliver a rate hike in the UK to 0.5%, the first hike since the financial crisis in 2007.
It came as little surprise, with the market pricing in a 90% probability of this action prior to the announcement on “Super Thursday”. The act of hiking rates is perceived as ‘Hawkish’ and would typically drive the currency higher, but the price action reflected this was all but priced in.
The other positive element of the meeting, was the split of the voting members of the committee. The result was 7-2, showing that 7 members of the committee were in favour of the hike, with just 2 members dissenting. Forecasters had thought the split may be tighter, with a 6-3 or 5-4 majority to hike. These being the first two factors announced to the market, saw the pound appreciate half a cent against the dollar from 1.3220 to 1.3270. This move was sharply unwound as the market plunged over 2 cents to 1.3040.
The driver was the announcement that Mark Carney and his committee anticipates just two subsequent hikes, and not in the next year but over the next 3 years. This signified that in the short term we are very much looking at the ‘one and done’ scenario. The fears of Brexit and the unknown have perhaps rightly got the committee apprehensive of doing too much too soon. This was further underlined at the weekend, with comments from Mark Carney regarding fears of inflationary pressures that could be caused if we were to leave the EU without a deal.
Market traders and investors still question Carney’s ability to actually deliver what he says he will, in this case to raise interest rates. This was the market opinion in the UK and in his previous position in Canada. He delivered on the interest rate hike, but as the markets reflect, it was done in the most dovish of manners.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
Following the first increase in the Bank of England’s base rate in over 10 years, MoneySuperMarket’s money expert Sally Francis here provides some guidance for people who might be affected.
Sally said: “There’s been very little movement in the Bank of England base rate since 2009 so it’s understandable that most Brits aren’t sure how a shift could affect their finances. The 0.25% rise might seem small, but it could pave the way for a string of increases that could impact some of the biggest bills. We’re encouraging people to take control of their finances today and learn how any future changes could affect their money.
“A rise in the base rate, coupled with the end of the Funding for Lending scheme - a Bank of England incentive for financial institutions to borrow cheaply from it - early next year is good news for savers, but if you’re on a tracker mortgage your monthly instalments will rise as soon as any base rate increase is announced. If you’re on a capped or discount mortgage, you could also see increases so acting immediately could save you thousands in the long run, especially if base rate continues to rise. Switching to a fixed rate mortgage ensures that your monthly repayments stay the same for the duration of your fixed period, providing certainty and stability in your finances.”
For those with variable mortgages, the base rate rise might lead to higher monthly repayments, so here are MoneySuperMarket’s top tips:
As expected, Mark Carney and the Bank of England have risen the UK interest rate for the first time in 10 years, stating that: “The time has come to ease our foot off the accelerator”.
The rate has risen from 0.25% to 0.5%, returning it to the same levels it was prior to a drop following the Brexit referendum result in June 2016, a move designed to stabilise the economy during a tumultuous market in the wake of the landmark vote. The MPC (Monetary Policy Committee) voted by a score of 7-2 in favour of an increase, but has sought to curb any major fears of a quick rise and retain a level of cautiousness by stating in its report that, “All members agree that any future increases in Bank Rate will be at a gradual pace and to a limited extent”.
The rate rise has been expected to happen for some time and is seen by many as a direct response to protect British households from creeping inflation. Mark Carney, Governor of the Bank of England, is tasked with keeping inflation at a target mark of 2%, however September saw it rise to 3%, its highest figure since 2012.
The rate increase was also announced in tandem with an upgrade on the growth forecast for this year, which has been raised from 1.3% to 1.5%. The projections for 2018 have also been upgraded, and while this may sound promising for those who championed leaving the EU, the Bank of England has been very clear in asserting its position that Brexit is, and will remain, harmful to the UK economy. The report states that Brexit is causing ‘noticeable impact on the economic outlook’, citing the ‘uncertainties associated with Brexit’ and ‘Brexit-related constraints’, as having a detrimental effect on the financial system.
For the average UK citizen, there are some concerns that the cost of borrowing will now increase and therefore negatively impact those applying for mortgages and loans. The move is also expected to affect homeowners on interest only mortgages who have been enjoying low repayments with the potential to increase monthly payments. With nearly 4 million homeowners currently on variable or base-rate trackers, an increase of up to £12 per month could be seen for those with the average repayment loan of around £90,000 on their mortgages. There is also concern that many people who have never seen a rate-rise in their lives will be caught unexpected, and this could further squeeze a population where falling wages and consumer debt are prevalent.
The British pound fell sharply immediately after the announcement, but many analysts are still seeing this as a ‘one and done’ rise and do not expect to see any further changes emanating from the Bank of England until the terms of Britain’s Brexit is defined.
The Government estimates that between 225,000 and 275,000 homes need to be built per year to keep up with the rate of demand, however only 147,960 have been built for 2016/17 so far.
Many believe that this is because there is not enough money to buy the houses once they are built, as people cannot afford to get on the housing ladder due to the difficulty in saving enough deposit in order to get a mortgage, but this is not really the case as property priced at the more affordable end of the market, tends to be snapped up pretty quickly. In addition, the mortgage market has improved significantly and higher loan to value mortgages are once again available, although not at 100% loan to value as they were before the credit crunch.
There has been criticism over the government’s promise of a £2bn injection to help with funding to build social housing, as Downing Street aides have stated that this will only fund 5,000 of the 60,000 extra new houses needed to be built each year. Funding is certainly not the major issue and we look at the main problems surrounding building more houses:
Loss of workers thanks to credit crunch and Brexit
When the credit crunch first hit in late 2007, 100% and high loan-to-value mortgages literally disappeared overnight. It happened so fast that even mortgage offers already in place were not honoured as lenders’ funds disappeared. The difficulty obtaining a mortgage made the desire of buying a house nearly impossible for a lot of people. Less people to buy houses impacted builders and property developers very quickly and left them with a lack of work. The demand for tradespeople such as carpenters, plumbers, electricians, bricklayers, etc. was decimated. It is important to realise that this was not a gradual decline over a number of years, it was a massive decline that happened over a matter of months.
The industry shrunk quickly and many people lost their jobs. As so many people skilled in the same trades lost their jobs and were unable to find more work doing the same thing, they were forced to find work outside the building industry and re-train in different sectors.
Over the last ten years, less people have entered the building industry due to lack of job prospects. Now the demand is back and prices are high again, more people will be needed in order to build more houses. Unemployment figures across the country are low so not many workers will be looking for jobs and to add to this problem, many European workers who filled lower paid roles have returned to their home countries due to the stronger Euro and concerns about Brexit. To get more workers, the roles offered will have to be more attractive which will push the cost of building the new houses up further.
Is there longevity in the building industry with the uncertainty of Brexit looming?
When demand for new houses disappeared and jobs were lost, the production of building materials slowed, and for some manufactures, ceased altogether. To build more houses we will need more materials – but the factories have not been waiting on standby for all of this time. To increase the supply of materials, manufactures will have to commit to more production, meaning costs of finding new premises and employing workers.
As specialist bridging loan brokers, many of our customers are business owners and property developers. They tell us that they are reluctant to commit to any new ventures that could be risky at the moment due to the uncertainty for the future, mainly caused by Brexit. Until the country faces a more stable future, many individuals responsible for making decisions needed in order for us to move forwards and build more houses will be remaining cautious and unlikely to spend huge sums of money opening factories or training new workers as they just do not know if it will be profitable, or indeed if it could actually prove very costly.
(Source: Key Loans and Mortgages Ltd)
Today, the 5th July 2017, marks the ten year anniversary of the last time there was an interest rate rise in the UK.
On this date in 2007, the Monetary Policy Committee voted to increase rates to 5.75%, just as the wheels were about to come off the global economy. A decade on from the last interest rise, the Bank of England is once again mulling a rate hike, though the current level of consumer debt leaves the central bank facing a tightrope walk on interest rate policy.
Laith Khalaf, Senior Analyst, Hargreaves Lansdown: “It’s been a decade since the last interest rate rise, so it’s little wonder that borrowers have got used to the idea of cheap money. Indeed around 8 million Britons haven’t witnessed an interest rate rise from the Bank of England in their adult lives.
Low interest rates undoubtedly helped to prop up the economy in the wake of the financial crisis, by lowering the cost of debt for UK consumers and companies. However the burden of loose monetary policy has very much fallen on those with cash in the bank, who have seen the interest they receive wither away to virtually nothing.
Meanwhile the UK consumer has even more borrowing now than ten years ago, thanks to weak wage growth and the addictive nature of low interest rates. Rising house prices and the increased cost of a university education mean that the current generation of young adults are particularly accustomed to eye-watering amounts of debt.
There has been a sharp rise in consumer borrowing over the last year, and current conditions of weak wage growth coupled with rising inflation are likely to exacerbate the use of credit to fund living expenses. Indeed the savings ratio has now fallen to a record low, highlighting the squeeze currently facing UK consumers.
The fragile debt dynamics of the UK economy put the Bank of England in a bind, because while a rate hike would help to curb consumer borrowing, it will also make the existing debt mountain less affordable. The central bank therefore faces a tightrope walk between keeping borrowing levels in check, without putting too big a dent in consumer activity, which would have a damaging effect on the UK economy.
The Monetary Policy Committee has turned more hawkish recently, and expectations of a rate rise have built up considerably in recent weeks. However the large amount of consumer debt means that even when the Bank of England does finally decide to wean the UK off low interest rates, it will be a very slow and steady process.”
The cost for cash savers
Those with cash in the bank have now seen a decade of falling returns. £1,000 stashed in a typical instant access account in July 2007 would now be worth £1,107. However after factoring in inflation, which has risen 26% over the period, the real value would today be £878. By comparison the same £1,000 investment in the UK stock market in July 2007 would now be worth £1,666, or £1,323 after adjusting for inflation. (Returns calculated with interest and dividends re-invested).
This is a pretty astonishing result, seeing as this investment would have been made just as the UK stock market was about to fall by almost 50% as a result of the financial crisis. These figures highlight the healing power of time on stock market returns, even if you happen to be unlucky enough to invest just as conditions take a turn for the worse. The figures also demonstrate the toll taken on cash in the bank by such an extended period of low interest rates.
Indeed, over the last ten years the amount of money held in non-interest bearing accounts has risen almost eightfold, from £23 billion in 2007 to £179 billion today. At the same time the average rate on the typical instant access account has fallen from 3.3% to 0.4%, and the average rate on non-instant access accounts (including cash ISAs) has fallen from 5% to 0.9%.
(Sources: Bank of England, Thomson Reuters Lipper, Moneyfacts)
The benefit for borrowers
While cash savers have undoubtedly felt the pinch from lower interest rates, there have been benefits for borrowers which have helped support the economy. The typical mortgage rate has fallen from 5.8% in July 2007 to 2.6% today, helping to support household incomes and the housing market in the wake of the financial crisis. Unsecured consumer borrowing rates have fallen too. The result is much lower levels of consumer loan defaults. UK lenders have written off £2.5 billion of bad consumer loans over the last year, this compares to £6.8 billion in 2007.
Borrowing costs have also fallen for UK companies. The typical borrowing cost for a large company with a good credit rating has fallen from 6.4% in July 2007 to 2.8% now. This has allowed companies to gain access to funds cheaply, thereby supporting them in making investments and profits, and providing employment.
Low interest rates have therefore helped the economy by reducing the burden on UK consumers and companies. However it seems consumers are now increasingly taking advantage of low interest rates to load up on debt, which is causing concern at the Bank of England. Only last week the ONS published data which showed that the UK savings ratio has fallen to a record level of 1.7%, which suggests the consumer squeeze is beginning to hit home.
(Sources: Bank of England, Markit iBoxx)
Consumer credit warning signs
The Bank of England recently warned that consumer credit and mortgage lending were a key risk to financial stability in the UK. This is because there has been a rapid increase in consumer credit of late, which rose 10% over the last year. As a result the central bank is bringing forward an assessment of the banking sector’s exposure to potential losses stemming from stressed conditions in the consumer credit market.
In absolute terms, levels of UK consumer debt are actually higher now than they were on the eve of the financial crisis, a point in history when it is widely recognised that the UK was living beyond its means. Consumer borrowing (including credit cards, overdrafts and loans) now stands at £199 billion, compared with £191 billion in July 2007, and a highest ever level of £209 billion recorded in September 2008. Mortgage borrowing now stands at £1.3 trillion, up from £1.1 trillion in July 2007.
The good news is household income has also risen over this period, which along with low interest rates make this debt more affordable. In 2007, the household debt to disposable income ratio peaked at 159.7%. This fell back in the years following the financial crisis as consumers tightened their belts and banks became more reluctant to lend. However it has recently started to head in the wrong direction again, rising from 139.9% in 2015 to 142.6% in 2016.
The Brexit-induced currency crunch facing consumers at the moment can be expected to put further upward pressure on this ratio. With wage growth weak and inflation rising, consumers are more likely to rely on debt, while their disposable household income is likely to come under pressure. Indeed in its latest forecasts the Office for Budget Responsibility predicts this ratio will hit 153% in 2022.
(Sources: Bank of England, ONS, Office for Budget Responsibility)
The Bank of England bind
This all underlines the very difficult situation the Bank of England finds itself in. Raising rates will help to wean investors off borrowing, however it will also make the large existing stock of debt more expensive, which will eat into monthly budgets, putting downward pressure on spending and weighing on economic growth.
This is perhaps why the bank has so far chosen to use more specialised tools to deal with the sharp rise in consumer credit, such as tightening up mortgage lending rules and increasing bank capital requirements to deal with any downturn in credit conditions, rather than wielding the sledgehammer of an interest rate rise.
However, more members of the monetary policy committee appear to be in favour of a rate rise, which may mean we could soon be in for the first hike since 2007. Markets are now pricing in a 55% chance of a rate rise by the end of the year. However the fragile debt dynamics of the UK economy mean that even when the Bank does decide to raise rates, it’s going to tread very carefully indeed.
It’s also worth pointing out that this wouldn’t be the first time that expectations of a rate hike have risen only to be subsequently quashed. At the beginning of 2011, two years after rates had been cut to the emergency level of 0.5%, the market was expecting interest rates to be at 3% by 2014.
Charts and tables
The data behind these charts is available on request.
Here’s a summary of interest rate data:
|Bank base rate
|Average instant access account
|Average notice account (incl cash ISAs)
|Money in non-interest-bearing accounts
|Typical mortgage rate
|Annual consumer loan defaults
|Investment grade corporate bond yield
|Household debt to income ratio
|£1,000 in cash account, inflation adjusted
|£1,000 invested in stock market, inflation adjusted
The stock market fell sharply in 2007 and 2008, but has since staged a significant recovery, while cash has been left in the doldrums:
Consumer credit fell in the wake of the financial crisis, but has started to pick up again and is approaching a record level; weak wage growth and rising inflation are likely to stoke the borrowing binge further:
Low interest rates have helpd the economy in a number of ways, not least by making mortgage payments more affordable, which has helped to underpin the housing market:
Sources: Bank of England, Thomson Reuters Lipper, Nationwide, ONS
(Source: Hargreaves Lansdown)
Mortgage rates in the US fell for the third week in a row, with the benchmark 30-year fixed mortgage rate falling to the lowest level in more than six months, according to Bankrate.com's weekly national survey. The average 30-year fixed mortgage has a rate of 4.09%, the lowest since November 16th 2016, and an average of 0.25 discount and origination points.
The larger jumbo 30-year fixed slid to 4.02%, and the average 15-year fixed mortgage rate dropped to 3.31%, also the lowest since mid-November. Adjustable mortgage rates were mixed, with the 5-year ARM inching down to 3.41% while the 7-year ARM nosed higher to 3.60%.
Between inflation rates stalling out, consumer spending softening and ongoing questions about a White House scandal and its implications for policy initiatives, there is just enough uncertainty to keep bond yields and mortgage rates on a downward trajectory. Mortgage rates are closely related to yields on long-term government bonds, which appeal to investors any time uncertainty, or low inflation, is in the air. With a looming employment report for the month of May, investors will be looking for some confirmation of more robust economic activity in the current quarter than the anemic 1.2% annualized pace of growth in the first three months of the year.
At the current average 30-year fixed mortgage rate of 4.09%, the monthly payment for a $200,000 loan is $965.24.
30-year fixed: 4.09% -- down from 4.13% last week (avg. points: 0.23)
15-year fixed: 3.31% -- down from 3.32% last week (avg. points: 0.22)
5/1 ARM: 3.41% -- down from 3.42% last week (avg. points: 0.30)
There were increased signs of a slowdown in the UK property market last month, as the number of sales has fallen dramatically and even less are taking out mortgages. Analysis by data firm Equifax claims mortgage sales dropped by over 15% between March and April. But why is this happening? Here Mark Homer, Co-Founder of Progressive Property explains more for Finance Monthly.
Mortgage transaction volumes have continued to reduce, dropping in excess of 15% in most regions of the UK in April 2017 versus March 2017. As new mortgages tend to mirror overall property transaction volumes the whole market appears to be taking a breather. Continuing uncertainty caused by Brexit, Britain’s relationship with the EU and more immediately the general election appears to have put buyers off at least for the short term.
House prices have continued to fall in Prime London and growth has continued to moderate outside of the M25 with the Midlands and North showing reduced growth too. Overall UK house price growth has slowed to 4.1% in the year to March 2017. With much of the rest of the UK playing catch up to the huge growth in Central London since 2010 the market appears to be taking a breather.
Increased Stamp duty on buy to let properties, 2nd homes and higher end properties from March 2016 has had had a further dampening effect on the market with many taking a “wait and see” approach to moving house. A new buy to let tax which sees mortgage interest become not 100% off settable against rent for many from April 17 has also contributed to a more negative mood.
Interestingly, first time buyer purchases have increased since the stamp duty changes showing that the government’s policies to encourage these purchases over those of landlords appear to be working. With some lender’s mortgage rates now reaching their lowest ever rates sub 1% buying a home has become more attractive.
House price growth seems set to return to trend with 5%+ growth once these uncertainties subside and wage growth catches up with prices following a period of increased inflation after sterling devalued immediately after the vote to leave the EU.