The news that Britain’s inflation rate turned positive in July has added further fuel to the debate over when the Bank of England policymaker will raise interest rates.
The Bank’s governor Mark Carney (pictured) has warned households to prepare for a rate rise and while experts think it unlikely that we’ll see a rise until the first half of 2016, some have mooted that the first hike in rates could come possibly as early as February. What does this mean for your clients?
Having got used to the exceptionally low rate that has prevailed since 2009, the danger is that the prospect of an increase could cause some to panic as many are likely to have seen little real increase in their income. Despite the current rate of inflation, I’m sure many feel their pockets are still being squeezed and will want to cut other outgoings if their mortgage repayment is going to go up.
Many of you are probably already busy trying to help clients fix mortgages before the current raft of competitive offers from lenders disappear, but here are a few thoughts on helping your clients through their budgeting process.
First and foremost, it will be important to reassure them that the Bank isn’t going to impose a major increase straight away. It’s going to be a gradual process increasing a quarter of a percentage point at a time to reach – possibly – 2.50% by the end of 2018. Given the massive shock that our economy suffered at the time of the credit crunch and resulting recession and the continuing pressures on the global economy, it’s also likely that we’re going to see low rates prevail for some years to come. A relief no doubt to those who lived through the eye-wateringly high rates in the 1980s!
One property group recently ran an exercise to review average house prices across a number of regions in the UK and analyse three different scenarios based on LTVs of 90%, 75% and 60%. Studying current monthly mortgage payments at the best available, variable market rates and projected the increase should the base rate move up incrementally. Unsurprisingly perhaps, the biggest jump would be faced by a Londoner with a 90% LTV. Under this scenario, their monthly outgoings would increase by almost £500 by 2018. For the average UK homeowner, the most significant jump would be felt by those also with 90% LTVs with monthly payments increasing by £189.
Clearly this is all speculative stuff but it could help your clients think ahead and plan for a future increase.
Another area for them to review is, of course, the insurance they must have in place protecting their home and their lender’s investment. So while you’re looking at their mortgage, it might be wise to review the insurance options available to them to help make sure that they can continue to enjoy appropriate cover at a price they can afford. If they haven’t remortgaged for a while, the insurance renewal process may well have become a tick box exercise. Take the time to go through their current lifestyle and requirements and it could well be possible to find competitive quotes through your general insurance provider that will save them money without cutting back on cover.
It’s going to be an interesting few months and I’m sure a busy one for mortgage brokers. Don’t forget that your general insurance providers are here to help you help your customers where we can!
Brian Coulton is head of sales at Source Insurance