Putting the interest rate rise in perspectivePosted: December 17, 2021 | |
Originally written as a column for Inside Housing.
‘Millions hit by higher mortgage bills,’ ran the headlines after the Bank of England raised interest rates for the first time in three years.
‘Worst blow to first-time buyers since financial crisis,’ was the Telegraph’s verdict on the increase from 0.1 to 0.25 per cent. The move had been long expected but it was still enough to send shares in housebuilders lower and banks higher.
Most mortgages are now on fixed-rate terms so most borrowers will not see an increase immediately, although the decision will add around £10 a month to repayments for someone on the standard variable rate and £15 a month for a tracker mortgage customer.
With energy bills already rising, council tax bills going up next year and price inflation at 5.1 per cent and rising that can only add to the worry for those borrowers who are already stretched.
Another way of looking at the interest rate rise is that 0.25 per cent is 20 times lower than what would have been considered a ‘low’ rate before 2008. The record lows since the financial crisis have now lasted for more than half the term of what used to be a standard 25-year mortgage.
Little wonder that house prices have boomed and the wealth of home owners has rocketed and that first-time buyers have faced a ‘worst blow’ more or less every month.
Nevertheless there are bigger questions that lie behind what is largely a symbolic decision driven by the Monetary Policy Committee need to meet market expectations about a rent increase to tackle inflation that is now far above its 2 per cent target.
The Omicron outbreak probably delays further increases for now but more do seem to be on the way. Nobody know for certain how many but at some point the pressure of higher mortgage payments would be felt in lower house prices. Capital Economics expects modest further interest rate rises but reckons 2 per cent would represent ‘correction territory’.
That would be of course good news for anyone hoping to buy who has been waiting for exactly that but more ‘worst news’ for recent first-time buyers who have stretched themselves to the limit to buy at inflated prices.
All of which makes it a slightly odd time for another part of the Bank of England to be proposing a significant change to it rules on lending in a consultation on withdrawing the requirement that lenders assess whether borrowers could continue to afford their loan if the mortgage interest rates rose by 3 percentage points above their standard variable rate.
The Financial Policy Committee’s reasoning is that mortgage rates are considerably lower than when the rule was introduced in 2014, that there has been no significant increase in mortgage debt to income ratios (as seen in the housing market booms before 2007 and in the late 1980s) and that this will improve market access for first-time buyers. Other controls on, for example, high loan-to-income lending, will remain in place.
However, this highlights a continuing paradox about mortgage lending and the housing market. Controls on higher-risk lending introduced after the financial crisis may have improved financial stability but they have also disadvantaged potential first-time buyers in favour of existing borrowers with equity.
Access to credit has become a source of inequality, with those who cannot qualify for a mortgage forced to pay more in rent, and this relaxation helps to tackle it.
That seems to be the conclusion drawn by Michael Gove in an interview in this week’s Spectator as he argues that:
‘People are paying more in rent for a property than they would do if they were servicing a mortgage. The amount that you would have to pay as a deposit to get that mortgage, I think, is out of kilter with the real risk.’
On this basis, he argues that the mortgage market is a bigger problem than the planning system. Asked if he would like to see a return to the 95 per cent mortgages seen before the financial crisis (actually they were 100 per cent and sometimes more than and often with self-certified income), he says: ‘Ultimately, it is a matter for the Bank of England. But you can’t look at ownership without access to mortgage finance.’
The levelling up secretary has a point in that the unaffordability of house prices has always been about more than supply, but note the way that he is passing the buck, distracting attention from the planning reform he knows is politically toxic in his own party and almost airbrushing the affordability crisis out of his brief.
As for that job of levelling up, the rate rise also has to be seen from a perspective that those newspaper headlines do not provide.
For starters, compare that ‘worst blow’ of £15 a month to the impact of the withdrawal of the £20 a week uplift from millions of people on Universal Credit – this just as Covid cases start soaring again.
And then think about the rent increase faced by social tenants next April. The formula of CPI plus 1 applies to the inflation rate in September (3.1 per cent) rather than now but that would still mean a 4.1 per cent increase for millions.
That would add around £4 a week to the rent of the average housing association tenant in England, more than the £15 a month rise faced by people on tracker mortgages, but it will not make remotely as many headlines.