When Mark Carney became Governor of the Bank of England five years ago in 2013 he talked about providing ‘forward guidance’ on interest rates – effectively this would see an end to sharp changes in Bank Base Rate (BBR) and would provide greater certainty for all concerned.
Now despite being labelled an ‘unreliable boyfriend’ because of the perception that he has a distinctly changeable view on the future of BBR on any given week, Carney might well point to a very stable half a decade when it comes to the actual rate. For most of his tenure, apart from that immediate period post-Brexit when the MPC voted to cut BBR to 0.25%, the rate has actually stayed at 0.5%, although that again might be tested next month with rumblings that rates could be increased.
The point is whether we’ve actually needed ‘forward guidance’ and whether – at any other time in history – this might have been a very good idea. Well, according to the Deputy Governor, Sir Jon Cunliffe, ‘forward guidance’ does actually live on and he’s attempted to provide it recently with a view that BBR will remain under 2% for the best part of 30 years.
Given the history of the MPC’s decisions on rates you might think such talk is fanciful at best – this wouldn’t just be ‘forward guidance’ but ‘forward guidance-plus-plus’ or indeed ‘forward guidance on steroids’ if you will. Is it really possible to plan out a 30-year route for BBR, especially when others within the MPC have suggested it will rise to 2% within the next 18-24 months – a period (lest we forget) in which Brexit will undoubtedly have a few things to say about the UK economy and the need perhaps for further interventionary measures.
Perhaps this isn’t such an unwieldy timescale to be dealing with? As mentioned above, BBR has stayed (pretty much) at 0.5% since March 2009, close to 10 years and there appears to be no doubting that – for the foreseeable future at least – we will remain in a low-interest rate environment. The ‘new normal’ is often talked about and there is a likelihood this will be around the 2% mark, rather than the 5/6/7% we experienced pre-Credit Crunch. Whether we’ll still be in that ‘new normal’ come 2048 however is anyone’s guess.
What is interesting of course for advisers (and borrowers) in all of this is that – for the most part – product rates bear little relation to BBR anyway. The ‘normal’ for first-time buyers with a small deposit has been between 3-5% for some time, while even those with the healthiest of deposits will still expect to pay between 1.5-2.5%.
Indeed, lenders themselves reportedly recently to the Bank of England and suggested that, while the spread of prime mortgage rates had narrowed for the sixth consecutive quarter, they anticipate a divergence in Q3. In other words, lenders would not be acting as uniformly as they had in the most recent past – while some will undoubtedly cut prices in order to secure business as they motor towards the end of the year, others have already increased rates in anticipation of future BBR/LIBOR increases. The fact of the matter is that – for the majority – the cost of funds is entirely unrelated to BBR and (as they have always done) individual lenders will cut their cloth accordingly when it comes to rates, factoring in many issues such as competition and the like.
When public figures talk about BBR and its future in ‘historically low’ terms it is often up to advisers to provide a reality pill to those borrowers who might see the 0.5% ‘headline figure’ and think this is the mortgage rate they can expect to pay. Nothing could be further from the truth and this disparity between BBR and product rate is not going away anytime soon.
What we would like to see however is the significant disparity between the rates paid by those with smaller and larger deposits narrow – should first-timer buyers on a 90-95% LTV have to pay two-thirds more each month for their mortgage than those on 75%? We don’t think so and there are ways and means that lenders can cut their credit risk on the higher LTV products whilst at the same time providing a much more competitive rate to those that meet their affordability criteria – mortgage insurance being one such tool.
Indeed, if we can have a future with greater rate certainty for all, specifically lenders when pricing products, then might we be able to translate this into rates which do not fluctuate so ‘violently’ and thus deliver better product options for borrowers? If we can, then forward guidance of this kind, would certainly seem to be worth having.
Pad Bamford is business development director at AmTrust Mortgage & Credit
