What effect will it have on mortgages, have interest rates now peaked & is 2023 the year to buy?
This week the Monetary Policy Committee of the Bank of England again voted by 7 – 2 to increase the Bank of England Base Rate by a further 0.5% taking the overall rate to 4%. This is the highest it has been in almost 15 years.
Whilst this move was very much expected and priced into the market already, it will still come as a blow to many families and businesses.
Much depends on the rhetoric that accompanies this change and the language of the Bank of England in the coming weeks as to what happens next. Whilst there could even be another move after this to 4.25%, I personally do not see the need to move any further at all, especially as everyone expects inflation to fall perhaps dramatically over the course of the year.
I hope this is now the peak of the current cycle and the Bank sees the need for some breathing space to be given to people to fully adapt to the higher interest rate environment and to assess the effects of these rate rises, rather than going too far and hurting the economy, and families, more than necessary.
As always it is not as simple as assuming that everyone will now face even higher mortgages, and only those on a variable or tracker rate will be affected immediately, and even then not in all cases.
Those on a tracker rate mortgage will be impacted and will see their rate increase by the same amount next month. It will be interesting to see if mortgage lenders decide to increase their already high variable rates further or keep them at their current levels.
Although not all lenders will increase their Standard Variable Rates, (SVR), those who are still on their lender’s SVR may well find now is the time to move off this. Flexibility can still be achieved with many tracker rate products having no Early Repayment Charges, so it would make sense to pay a lower rate whilst possible.
As an example of the changes, on a £300,000 loan with a 20-year term remaining and currently paying 3.5%, someone on a variable or tracker rate will see the following increases:
Those on a fixed rate will of course see their monthly payments stay unchanged, whilst those looking for a new mortgage will also notice that despite the Base Rate rise, fixed-rate pricing will remain unchanged as most products have this rise already priced in.
What is more, given increasing levels of competition from lenders, they should still fall slightly over the coming weeks.
In fact, since this latest announcement SWAP rates, (the cost of future money on which lenders base their fixed rates), have actually fallen. As an example, 5-year money has fallen to 3.29% so we should see more fixed rates starting with a 3 rather than a 4 in the coming days.
That said, do not expect rates to get anywhere near the ultra-low rates of the past few years, as the new norm seems to be around 3% to 4% for the foreseeable future, and if 2022 taught us anything, it was to expect the unexpected.
In other words, if you need to buy or remortgage it no longer seems as important to wait to try to play the rate market. Locking into a deal now may be a good option and if rates do get cheaper before completion, we can, in most cases, change you over to the lower rate before then.
We have seen a higher-than-expected level of demand since the start of the year, which shows that many prospective buyers share my view that 2023 is being seen as a good year to buy, with prices easing a touch before rising again in the next few years.
My mantra has always been that the best time for anyone to buy is when it suits them to, and it is affordable to do so. Holding off on the idea that it may be cheaper to next month or year does not always pan out, and often a chance is missed.
Whether or not rates start with a 4 or a 3 or anything else for that matter is not the point, the main point is affordability and the monthly payments. Are they affordable and do they get you the property you want at the time you want it?
The market can move in any direction, and trying to second-guess what happens next is tricky at the best of times.
As I mentioned on BBC News last week, for First Time Buyers who are comparing monthly mortgage payments to ever-increasing rents, the comparison is not out of kilter so their demand to buy this year will remain strong as rates stabilise and ease.
All of us at Coreco are here to help advise and guide you with any assistance you need, so please do not hesitate to contact us at any time.
Wishing you all a happy, healthy, and prosperous 2023.