Today’s (7 August) announcement by Mark Carney, governor of the Bank of England, that interest rates will be kept on hold until unemployment falls below 7 per cent was welcomed by many across the financial services industry.
Giving the detail on his much trailed ‘forward guidance’, Mr Carney said that an increase in interest rates would only be considered when the unemployment rate, which currently stands at 7.8 per cent, fell to 7 per cent. According to many commentators, this could take us past 2016.
There is no doubt that Mr Carney’s announcement has given a much greater degree of certainty over future rate movements, which will give confidence to the likes of mortgage lenders and fund managers.
The improved pricing consumers may enjoy on, for example, mortgage products will be a real positive and there will surely be further optimism over our economic prospects amid a more settled rates environment with things starting to pick up anyway.
But of course, announcements of this nature are always a bit of a double-edged sword.
More buyers, but not FTBs
Paul Smith, chief executive of estate agency group Haart, said that the prospect of interest rates being held until unemployment falls is the biggest boost that the property market has seen in a long time, “allowing lenders to lock in and offer attractive rates to those seeking a mortgage”.
Richard Sexton, director of E. Surv chartered surveyors, added that Carney’s move will encourage more buyers to the market.
Clearly, those with the deposit to get on the housing ladder will benefit from the likely improvement in rates on new products. However, Mr Sexton adds that we’ll see the same existing buyer bias as first-timers continue to struggle to stump up the up front cash until rates rise again.
According to Danny Cox, head of advice at Hargreaves Lansdown, savers will be hit the hardest by Mr Carney’s proactive stance. He warned that the bank is likely to tolerate above-target inflation over the next few years meaning real interest rates will remain negative, while savings rates will remain non-existent, .
Anyone reliant on savings - many pensionsers for example - will likely suffer, as will the many whose wages are moving horizontally year on year. And prospects for hopeful first-time buyers could deteriorate, too.
In order to get onto the housing ladder - here in the south-east at least but for much of the rest of the country these days as well - you need a sizeable deposit of at least £15,000. Very few even modestly sized houses are available for less than £150,000 and 10 per cent deposits are often demanded, or in any case needed to keep the mortgage rate affordable.
For those that don’t have the bank of mum/dad/grandparents (delete as appropriate), first-time buyers will be saving for a deposit in a bank account.
Mr Cox said: “Interest rates on cash deposits aren’t going to rise anytime soon and certainly not significantly for three years it seems.”
Repossession timebomb
According to the latest data from the Council of Mortgage Lenders, the repossession rate in the three months from January to March 2012 remained at 0.07 per cent for the fourth consecutive quarterly period.
This rate is the equivalent of fewer than 1 in 1,400 mortgaged properties being taken into possession by lenders each quarter.
Mr Sexton believes that interest rate rises, when they finally come, will be a “hammer blow” to existing mortgage holders. This confirmed stay of execution is therefore welcome for both precariously positioned homeowners and their lenders, but is only useful if something is done about these ‘zombie households’.
Mr Sexton said: “Homeowners – and particularly borrowers in arrears – will be praying unemployment doesn’t fall to 7 per cent anytime soon.
“There are a block of 30,000 or so borrowers in severe mortgage arrears who have been teetering on the brink of having their homes repossessed. If rates rise, repossessions are likely to rise significantly.”
Some may argue that borrowers should have taken advantage of the low interest rate and paid down more of their mortgage. However, for the last few years, consumers have seen soaring food prices, utility bills, and general rises in the standard of living while wages have remained for many stagnant at best.
The guidance has thrown down the gauntlet. The industry has three years to get to grips with this issue and develop plans for the struggling households that are under threat.
