Find out what the base rate rise means for you
By Chris Gilchrist
The Bank of England raised its base rate to 5.25% in February, which was quickly reflected in higher mortgage rates. We look at the prospects for savers, property investors and homeowners.
The rate hike came as a surprise to City economists, who again proved their collective uselessness at forecasting and reminded us that we should pay no attention to what they say about the future. I must rub it in a bit more: “An economist is someone who will tell you tomorrow why what he predicted yesterday didn’t happen today”.
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Interest rates could hit 6% before they stop
I have been saying for months that rate rises wouldn’t stop at 5% and were likely to go to 6%. The steady rise in the underlying rate of inflation in the UK is what prompted the last rise.
There’s a marked divergence between the old Retail Price Index (annual rise: 3.8%) and the newer Consumer Price Index (3.0%). The official index is the CPI but it’s the RPI that’s used in a lot of big wage negotiations. Until recently, it was public sector wages that were rising at above the rate of inflation. Now private sector wages are heading in the same direction.
Since a large proportion of our economy is accounted for by services (restaurants, childcare, hairdressers, accountants), there’s a real risk that wages will send their prices higher and feed an inflationary spiral.
On top of that, old-fashioned central bankers are supposed to control the amount of money circulating in an economy, and in the UK this is still increasing at a much faster rate than prices or the potential growth rate of the economy.
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Party-poopers close the bar
I don't believe the latest rate hike will make enough difference to either trend and expect another quarter-point rise in the next two months. Even that is unlikely to slow the economy enough to curb inflation.
Sadly, that’s how it is - in good times, central bankers are party-poopers whose job it is to slow an economy down to a pace it can grow at without too much inflation. Their job is harder when you have a government that is spending money like a drunken sailor and thus inflating public sector pay packets, but don’t expect the Bank of England Governor to put it like that when he reports to his boss Gordon Brown. And to be fair, a booming world economy is also creating inflationary pressure all over the shop, even in China.
As usual, a rate rise is good news for savers and bad news for borrowers. But on this occasion it's good news for pretty much all savers, but bad news only for some mortgage borrowers. That’s because competition is intense and interest rates on personal loans and credit cards are unlikely to rise, so it’s really only mortgage borrowers who will feel the pain.
Our mortgage best buys could cut the cost of your mortgage
Interest rates could hit 6% before they stop
I have been saying for months that rate rises wouldn’t stop at 5% and were likely to go to 6%. The steady rise in the underlying rate of inflation in the UK is what prompted the last rise.
Mortgage pain for some
As for mortgages, lenders were quick to withdraw their current crop of fixed-rate offers, and I'd be surprised if we see new fixed rates offered at under 5.5% for a five-year term. HSBC was one of the few to launch a new offer, at 5.55% fixed for five years with no arrangement fee, which is not a bad deal. The Halifax’s Standard Variable Rate is now 7.25%, and in my view fixed rates are still pretty good value compared with SVRs.
Anyone with a tracker mortgage taken out at 3.5% in July 2003 has probably long forgotten how smug they felt; since then, their monthly payments on a £150,000 mortgage have risen by 75% to £656 per month. They could have got 4.1% fixed for 5 years in 2003 (£512 per month), so how about that for one of the worse decisions you could have taken.
On the other hand, in every month since 2003, fixed-rate loans have accounted for between a quarter and two-thirds of all mortgages taken out, so millions of borrowers - me included - won’t give two hoots about a base rate rise.
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The end is nigh
First Time Buyers have been priced out of the market. Only the prime and super prime parts of the market, especially London and the Home Counties, are likely to carry on for a while unaffected - a bit like Wile E. Coyote running off the edge of the cliff.
I have never been a property enthusiast, even though I’ve made a lot of money from houses. I've never really done the sums, but I have always spent a lot of money on my houses, and that doesn’t show up in the statistics from Nationwide and Halifax - all they have is the sale prices.
If you add in all the money people have spent improving their homes - and they’ve done far more of that since Gordon Brown raised Stamp Duty - then the profits aren’t as astronomic as they look.
One of my favourite investor-writers Peter Lynch once said you should never buy anything that needs feeding. That’s how I feel about houses - they always need feeding with money. So unless the price is going up, your house is costing you money. I think you need to be prepared for that, and I believe we could have a pretty well static market for several years. Look on the bright side though - if we don't get flat prices, we’ll have a crash.
As for Buy to Let, well, it really is the end. If I'd bought a new BTL flat in the past few years I'd be looking to get rid of it as fast as I could.
