So, with the unexpected but welcome inflation fall, a few lenders have announced welcome cuts on some fixed interest rates. The actual decreases are minimal but could be the first signs that we have reached the high point of interest rate rises. Moneyfacts reported (at the time of writing) the average rate on a new two year fixed-rate deal was 6.79% – down from 6.81%. Meanwhile, the typical rate on a new five-year fix was down to 6.31%, from 6.33%.
Of course, as they say in the country ‘a single swallow does not a summer make’ and these moves are, at this stage, no more than a testing of the water. For these falls to start a definite trend depends largely on the Bank of England deciding not to raise interest rates again or to limit the rise to a quarter of 1% rather than the half that had been predicted.
In what has been considered a likely outcome by many pundits that the Bank’s only weapon to curb inflation is to raise interest rates again, the recent drop in recorded inflation gives us hope that the worst is behind us, and if it is, it will come as welcome relief to the many thousands who are looking at big increases in their monthly payments as their current fixed rate deals end. However, it is still too early to tell whether we have reached the peak of interest rate rises.
The Bank of England is also under pressure not to raise interest rates too far for fear of tipping the country into recession. The message comes from a former Governor of the Bank, who said that the monetary policy committee could tighten monetary policy too far if they pushed for further rate increases, which in turn could trigger a recession. He went on to say that the signals from the credit markets in 2021 that indicated inflation was about to rocket were now showing that price growth was about to drop sharply.
The evidence of the aggressive BoE’s interest rate rises is seen in the pressure put on homeowners who have seen their mortgages become more expensive or are facing a potential doubling of their repayments when their current fixed rate expires. On top of that, some economists have predicted unemployment could increase next year as more businesses fail and job vacancies fall.
Clearly, the Bank, through its monetary policy committee (MPC), is in a difficult position. On the one hand, it has a duty to combat inflation through controlling interest rates but on the other it runs the risk of kickstarting a recessionary cycle, which is not an outcome that anyone would want to see. With the benefit of hindsight, the BoE could have acted sooner to raise interest rates when the evidence at the time suggested a steep rise in inflation was imminent before it then jumped to more than 10% in 2022. However, we are where we are.
If we take a positive stance, it would be plausible to hope that having raised interest rates as far as the BoE has, we are seeing the first evidence that the inflationary spiral is indeed running out of steam and by not adding to the now more then twelve months of rises, inflation will continue to fall. The alternative view would be that inflation is not beaten and that we should guard against a false dawn and continue to batten down the hatches.
25 year mortgages anyone?
Yes, they have been around for a while now but are they the answer for homeowners looking for stability of mortgage repayments during their mortgage term, given the turmoil in the market? Government minister Michael Gove is definitely of the opinion that longer terms offer borrowers greater certainty over their home loan payments. Admittedly, it has not yet become government policy but looking at the pros and cons, it is clear that many people will want to give longer terms mortgages greater scrutiny.
Much more common on the continent and in the States, twenty five and thirty year terms have only become part of the mortgage landscape in the UK in recent years because of issues stemming from affordability and making incomes stretch further. However, they still make up a tiny percentage of new mortgages. In the UK, we have been wedded to much shorter fixed rate terms which have tended to be cheaper and more flexible than longer term offerings. So, whilst the idea of having a long term rate that clients can rely on not to change would be comforting in times of rate volatility, being locked into a rate for twenty years plus that would be considered high against those on offer just a year ago without paying swingeing redemption penalties is not the answer without substantial modifications.