IN MARCH 2018 I wrote an article entitled 'Mortgage Stress Test at Seven Per Cent'. It said: “To stress test their mortgages at seven per cent would be unheard of. That would be Armageddon and a ‘conspiracy’.”
Until it wasn’t of course. It has surpassed that level. My view then was that those short of 40-years-old hadn’t experienced the rates at 16 per cent, and any thought of seven per cent to them was a vision they couldn’t imagine. It’s been that way for 15 years. Why would it change?
We can argue about the reasons for rates being hiked now but what I said then, and what I still reiterate today, is this same sentence: “the financial security of a family is much more important than the profit of a house, as those north of the aforementioned ages will bear witness to.” It’s your home, don’t gamble with it, or your ability to pay the mortgage rate.
The real drivers of inflation were: China’s zero covid policy (they closed factories) which created backlogs of supply while demand remained high and drove up prices; the cost of shipping absolutely soared; a nose-dived sterling, so when you are a net importer, prices rise; restriction of supplies due to sanctions against Russia (subsequently energy); profiteering from energy companies and corporations. None of these are under the control of the ‘man on the street’ who is being clobbered by high interest rates.
There is no justifiable logic for me for the Bank of England to raise rates to calm inflation. There is logic, but not justifiable.
So, what to do with your mortgage rate? It is very painful, but are there signs on the horizon of rates falling?
While headline rates from the central bank are rising, and continuing to rise, actual mortgage rates are now falling. That isn’t a headline the Bank of England wants to have heralded out there as they want people to feel the pinch, to be worried, to feel under pressure. This keeps wage demand low, they think. My view is that it’s counter productive and an ancient way to slow down inflation.
If inflation is high, coupled with mortgage rates rising, the logical response from the consumer is to demand more wages, which of course, the organisations cannot afford as they are being squeezed themselves. This is evident in all the strikes and wage demands. Make that strategy make sense!
The next impact is in the housing market, as people feel insecure, they pause on any developments, particularly as all the headlines are saying rising rates, they stop buying and house prices fall which takes confidence away from the consumer again. All of this can be avoided of course.
Current facts show that two-year swap rates did not move after the August rate rise. A ‘swap rate’ is an indication of what the markets think interest rates will go to. It is what a lender will pay to a financial institution to acquire fixed funding for a set period of time, which they then use to price up their mortgages and lend/sell to you.
Swap rates in July were around six to 6.3 per cent, and are now under six per cent. The drop in swap rates is potentially a simple reverse of an over-egged strategy of increasing rates and is simply pulling back from that overegged rate.
The reason lenders may be lowering rates is because people are just not borrowing. If they want business, they will have to do better, as borrowers are just sitting tight, and in a shrinking pool, they need to be extra competitive.
As I explained in my inflation hoodwink column, inflation is calculated on a year-on-year basis. The rise 12 months ago won’t be in next month’s figures. Inflation won’t have fallen, that month will just not be in the new 12-month figure. Next month, the same happens.
Over the next few months all those rises leave the historic figures and so inflation appears to have ‘fallen’ but it hasn’t. We have to have an election by January 2025, but it can be much earlier. There were elections in 2015, 2017, 2019.
As these inflation numbers collapse, the pressure on interest rates would naturally collapse with it and a feeling of goodwill would arrive just as an election appears.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a mortgage question mail mortgage director Pat Greene on pgreene@wwfp.net or call 028 6863 2692.
