Following the Bank of England’s decision to increase interest rates by 0.5%, a selection of advisers, wealth managers and mortgage brokers share their thoughts with IFA Magazine:
Scott Taylor-Barr of Shropshire-based broker, Carl Summers Financial Services: “With rates rising yet again, the sensible response may seem to be to lock into a fixed rate for as long as you can, but it’s probably not the right one. At the moment, fixed rates are carrying a far larger premium over variable rates than we have seen for quite a while. For example, why is fixing at 3.59% a good idea if you can have a discounted variable rate at 1.85%? That’s a 1.74% premium to have the security of a fixed rate. You need quite a few rate rises before the variable rate even matches the fixed rate, let alone surpasses it. And be especially careful if you are thinking of jumping out of a currently really low fixed rate and paying a penalty to do so, to lock into a new rate now. What if the current upwards interest rate cycle is not sustained and fixed rates begin to fall back in 2023? You’ll have lost out on the remainder of your really low rate deal, paid a penalty to your old lender and now be locked into a more expensive rate. So, think carefully, don’t make a hasty decision and make sure you get good quality, professional mortgage advice.”
Ross Boyd, founder of the always-on mortgage comparison platform, Dashly.com: “After this rate increase, many people coming to the end of their fixes are going to be facing a world of pain. And more rate rises are likely as the Bank of England seeks to bring inflation to heel. Though this latest rate increase was expected, it’s a big one and a statement that the era of ultra-low rates is now over. It’s more important than ever that existing and prospective homeowners seek advice from independent mortgage brokers, and challenge their mortgage every day in order to make savings, as we are currently in highly uncertain and volatile times.”
Andrew Montlake, managing director of the UK-wide mortgage broker, Coreco: “It’s batten down the hatches time for Britain’s mortgage holders. The Bank of England has shown its teeth today with this 0.5% hike and more rate rises are almost certain this year to control runaway inflation, which will only get worse due to more energy price hikes in the Autumn. The worry is that these rate rises are doing little to help and the higher we go, the more borrowers will start to hurt and struggle with the additional burden on top of the ever-growing cost of living crisis. We have already seen lenders putting up their rates again this week in preparation, but borrowers should now be prepared for some further changes from lenders with little notice. For those looking at buying, quick decisions need to be made before lenders hike their offerings, whilst those looking at remortgaging should be looking at locking into a rate six months before their existing product expires.”
Gindy Mathoon, founder of Derby-based mortgage broker, Create Finance: “With rates rising by 0.5%, we may soon start to see people downsize or sell their properties so that they can cope with the cost of living crisis. This could result in a wave of properties coming onto the market, which potentially could lead to property prices decreasing. With short-term fixed rates increasing, applicants are now increasingly opting to fix for a longer term because of the uncertainty in the current financial climate. What we are also likely to see is people extending their mortgage terms just to cope with the increased cost of their mortgage payments.”
Samuel Mather-Holgate of Swindon-based Mather & Murray Financial: “This expected increase to the bank base rate is good news for savers in theory, but holding money on deposit is still a sure-fire way of losing money in real terms. Some banks will not pass the full increase onto customers as they look to shore up their balance sheets ahead of what is widely predicted to be a sharp recession.”
Philip Dragoumis, owner of London-based wealth manager, Thera Wealth Management: “UK interest rates were raised by 0.5% as many expected but the Government bond markets see interest rates peaking at around 3% maximum. Long-term bond yields have fallen significantly over the past month with the 10-year falling to 1.9% from a high of 2.6%. This means the markets predict that inflation will fall, that there will probably be a recession and that eventually interest rates are likely to be cut again. For investors saving into their pensions for the long term, there is no need to make any changes. Clearly every portfolio’s composition depends on the risk profile, tolerance and liquidity needs of the investor but over the long term only a significant allocation to equities will lead to returns above inflation, if history is our guide. Stockmarkets have recovered off their lows as have bonds, showing how wrong it would have been to have made big allocation changes to portfolios on the back of one quarter’s performance. The short term as always remains unpredictable so we always recommend to stick with the long term plan.”
Joshua Gerstler, chartered financial planner at Borehamwood-based The Orchard Practice: “They won’t be popping the champagne corks quite yet, but this latest rate rise is good news for savers. Those who are holding money in bank accounts are taking a pounding from inflation being so high and this latest increase will ever so slightly ease the pain. Those with longer term investments such as pensions and ISAs should continue to stick to their plan.”
Mark Hosker, director of Bradford-based Cyborg Finance: “Mortgage Lenders in recent weeks have been increasing their rates in anticipation of Thursday’s rate increase. With inflation continuing to rise, lenders will continue to factor in potential future rate announcements in the next few months. Existing mortgage borrowers with six months or less remaining on their initial term should start the discussion with their mortgage adviser today. 2-year fix is short-term and may land borrowers back into a market with high-interest rates. A 5-year fix gives borrowers certainty of payments for a longer term with fingers crossed inflation has been handled with interest rates decreasing again as a result. Variable rates are much lower than a fixed rate mortgage and may draw some attention but come with the risk of them increasing and giving borrowers no certainty of what the monthly mortgage payment will be. A long-term fixed rate mortgage can look attractive in today’s market but borrowers who may potentially need to sell their home within that timeframe should be wary of early exit fees.”
Lewis Shaw, founder of Mansfield-based Shaw Financial Services: “Any increase in interest paid to savers because of Thursday’s base rate rise is dwarfed by such high inflation levels. And then you have the double whammy of price cap rises in October and January, taking the average home energy cost to over £3,500 a year, all of which will make everyone poorer. It gets even worse for mortgage holders who, having to find extra money for food, fuel and energy, are being squeezed by increasing mortgage rates simultaneously. First-time buyers won’t feel the pinch as much because they’re usually moving from rented accommodation, which, as we know, is often higher than the cost of a mortgage. That said, anyone taking out a new mortgage will feel hacked off. After years of historically low rates, they’re now on the up, and they’re unlikely to ever come down to sub-1% where they were just 12 months ago. Considering all this, I think the base rate will be 2.5% by December.”
Jamie Lennox, director at Norwich-based mortgage broker, Dimora Mortgages: ”For potential and existing mortgage holders, there is no one-size-fits-all solution as to what they should do with their mortgage with rates rising. Some clients will need that longer term security and can’t afford to take the risk that rates will continue to rise, others will have the disposable income available to take the chance that rates may come back down at some point in the future and may look at fixing for a shorter duration.”
Graham Cox, founder of the Bristol-based broker, SelfEmployedMortgageHub.com: “Thursday’s rate increase was priced in but how high rates could go this year will depend on events across the pond. The Fed has already raised rates by 0.75% twice in quick succession. With commodities including oil and gas priced in US dollars, a weakening pound against the greenback is highly inflationary for UK imports. This is the dilemma the Bank of England faces. Raise rates too much, and the UK faces a prolonged and deep recession. Not enough, and inflation tightens its noose around the economy. For mortgage borrowers, locking in now to a fixed rate for several years at least removes uncertainty. Rates could go a lot higher, potentially to 4% or more in the next 12 months. Mortgage rates, if that happens, will be around 5%.This will be catastrophic for anyone coming off a fixed rate and needing to remortgage.”
Dominik Lipnicki, director of Your Mortgage Decisions: “Lenders are often quick to react to a Bank of England rate rise yet all too often the savers get left behind and see little benefit in the rate increase. We are seeing more and more mortgage borrowers looking at longer term fixed rates to have that much needed stability. With the cost of living crisis, huge energy price increases, many face a testing time and few believe that the situation will get better in the short to medium term. It is clear that the next Prime Minster will need to do more to help people get through the upcoming winter.”
James Miles, director of Exeter-based broker, The Mortgage Quarter: “The biggest losers with rates going up again are low earning people, who are already in ‘energy poverty’ and this will only sink them further into despair. For savers, banks are generally extremely slow to pass on the full increase in rates but even what is passed on will be largely irrelevant considering the massive gulf with inflation. Pay off your debts first and consider long term investments to combat the rise in living costs. Mortgage borrowers should be shopping around six months prior to their product expiry date so a decent broker can secure them a rate before further rises come into play. It’s still massively important you get advice and search the whole market for the right deal to fit your circumstances. There is no loyalty for staying with your bank for lending or saving. Face the ongoing crisis and plan for increased costs by budgets and cutting back on those unnecessary Direct Debits.”
Doug Miller, director at Bath-based independent mortgage broker, Lansdown Financial Services: “The most important thing in the current rising rate environment is to ensure people truly understand their own finances before purchasing a property and taking on a mortgage debt. Just because a mortgage lender can lend you X doesn’t mean you should borrow the maximum amount possible. Every single person has different spending habits, and understanding what is actually affordable to you is vital. With both the cost of living and interest rates soaring, completing an in-depth review of your own finances to understand what truly is an affordable monthly payment is vital, whilst also budgeting for higher interest rates and monthly payments in the future. Whilst longer term fixed rates are very attractive and similarly priced to 2-year deals for the first time in decades, early repayment charges on the longer term seven and ten year deals are astronomically high, meaning that it has never been more important to plan ahead and understand your future plans before committing to a mortgage product.”
Marcus Wright, MD of independent mortgage broker, Bolton Business Finance: “We are heading into unknown territory with the base rate and inflation. Although there is some benefit to savers, they would need to be pretty much mortgage/debt free or it will be cancelled out with rate rises. Also, the gap between inflation and savings rates is much higher now despite the increase in savings rates, reducing real world purchasing power. There are very few winners in the current inflationary and base rate increase spiral. My person view is we are heading for recession early 2023.”
