As interest rates increases now appear to be inevitable over the next 12-24 months, many market experts are reflecting on what is the best strategy for contractors looking to either take on a new mortgage or to refinance their current loan. As Mark Carney, the governor of the Bank of England, said last week, rates will need to increase soon as the UK economy has steadily improved beyond expectations.
Although Carney has consistently insisted that the Bank of England “will not take risks with the recovery”, incremental raises are required to begin balancing the impact of improvement across the markets. David Miles, a current member of the BOE’s monetary policy committee, said yesterday in an interview with Bloomberg that all borrowers and the banks need to set out a strategy to manage the impending impact of increasing interest rates.
Miles said: “Interest rates will not remain at this level for many years to come. They need to think very carefully what’s going to happen when the cost of that mortgage moves up.” While Miles clearly expects rate increases to be a formality at this juncture, he was clear that the BOE would not use the tool as a knee-jerk reaction to aid the market: “We do have, as the last line of defence, the blunt instrument, the big stick of interest rates. We’re a long way from that.”
Almost daily reports flood the market on the matter of property value increases, and while calls to reduce the use of the Help to Buy scheme and further measures to stem the tide of over-inflated prices have waned in recent weeks, many experts are continuing to warn contractors looking to borrow that they need to think carefully about what hit rates raises will have on their finances. Last week, the chief executive for Nationwide, Graham Beale, said that “a whole generation of borrowers have never experienced increases in their monthly mortgage payments.”
A survey conducted by the Money Advice Service report has recently found that 74 per cent of first time buyers had to stretch their personal affordability in order to secure the property they desired. In addition, 19 percent of those first time borrowers taking part admitted that if given the chance, they would now buy a cheaper property for their initial move onto the property ladder. The MAS is a Government supported body, and the poll took into account the views of 1000 recent first time buyers.
Within the details of the report it is clear that many purchasers admit that they had not taken into account the required solicitors charges and the impact of stamp duty on the purchase process. In a warning that all contractors looking to buy should consider, MAS are asking that purchasers be aware of all of the costs involved in the new purchase, including the changes to utilities, the new council tax costs and any insurance charges that will now be relevant.
The chief of MAS, Caroline Rookes, said: “It's really concerning to hear so many recent first-time buyers have over-stretched themselves financially. I urge all home buyers - even those higher up the property ladder - to ensure they are not taking on too much if they've borrowed the maximum available. Being able to afford the mortgage doesn't mean you can necessarily afford the home - and all the associated costs.”
Article By: Simon Butler, Senior Mortgage Consultant at Contractor Mortgages Made Easy
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