Charlie Bean, the outgoing Deputy Governor, has suggested this week that it should be a cause for ‘celebration’ when the Bank of England finally increases interest rates, after five years at 0.5%.
Bean said that the previous five years had been “tough for businesses and households” but hailed signs of recovery in business investment, adding “when the time does come for us to start raising the Bank Rate, we should celebrate that as a welcome sign that the economy is finally well on the road back to normality.”
This comes in the same week that Bank of England governor Mark Carney has suggested that interest rates could hit 3% by 2017, amid a rapid downturn in unemployment.
Whilst a rise in interest rates would be welcome news for savers, how would it affect those Contractors on ‘floating’ mortgage rates?
“This is a double edged sword if ever there were one” said Sat Singh, Managing Director at Contractor Mortgages Made Easy. “An increase in rates is for sure a sign of a healthier economy, and after a tough five years that can only be positive news.”
“There are clear worries however for the nation’s mortgage borrowers. We have already seen longer term mortgage rates edge upwards, and an increase of just 0.5% of the base rate could spell disaster for many families.”
A recent poll amongst mortgage professionals has raised concerns that a spike in interest rates could also lead to the withdrawal of the government ‘Help to Buy’ scheme – the very reason, say many experts, that the housing market has gathered speed.
“The Help to Buy scheme has increased access for many borrowers to 95% mortgages, making the dream of home ownership a reality again. The downside of this of course is that it will in turn cause house prices to rise, and the whole cycle could potentially start again” added Sat Singh.
The Intermediary Lending Outlook poll suggested that nearly half of all mortgage lenders expect the scheme to be withdrawn ahead of its originally-proposed 2016 cessation, with many more suggesting that the scheme will be withdrawn for remortgages earlier still.
“The scheme has done what it said on the tin” said Sat Singh. “The very purpose of the Help to Buy scheme was to enable those who were struggling to get a foot on the ladder to be able to get a step-up. There is now a weight of responsibility on the government to ensure that this does go too far and risk being abused.”
“If interest rates were to be increased too soon, many homeowners would be stuck between a rock and a hard place, as Standard Variable Rates would increase too, but they may not be able to secure new funding to replace their existing mortgages – particularly in light of the new MMR regulations coming into effect soon.”
Article By: Mark McBurney, Senior Mortgage Consultant at Contractor Mortgages Made Easy
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