By PETER O’DONOVAN 04/08/2006
The Bank of England shocked markets this week by raising the Base Rate from 4.50% to 4.75%. While a rise before the end of the year was generally anticipated, few expected it to occur this month given all seven members of the Monetary Policy Committee voted in favour of no change last month. This suggests the Bank of England is more worried about the threat of rising inflation than widely believed. The Consumer Price Index (CPI) rose 2.5% over the year to June, above the Bank's long term target of 2%.
| "Home repossessions have soared over the last year despite flat interest rates..." |
The rate rise is bad news for homeowners. Typical interest payments on a £250,000 mortgage will rise by around £50 a month, putting both homeowner finances and house prices under pressure. Home repossessions have soared over the last year despite flat interest rates, so this week's rise could see the trend for rising repossessions accelerate.
Repossession orders made during Q2 2006 were 22,254, a 21% increase from the 18,324 made during Q2 2005. Of more concern still is that repossession actions entered (a reasonable indicator of future repossession orders) were 33,180 in Q2 2006, up 16% on Q2 2005 (28,475).
The chart below highlights this worrying trend. Repossession orders are rising at a rate not seen since the early 1990's, a time when high levels of repossessions led to a steep fall in property prices because lenders were prepared to sell at almost any price to recover their debts. It's too early to panic yet, but if this trend continues the housing market could start to look increasingly fragile. (2006 property index change estimated from change over 1st 6 months of year).
The trend for rising insolvencies is also grim. Department of Trade figures confirm there were 26,021 individual insolvencies during Q2 2006, up 66% on Q2 2005 (15,645). Rising interest rates will likely lead to an even more rapid increase, as individuals struggle to keep up with debt repayments. According to Creditaction the total UK personal debt was £1,228 billion at the end of June 2006, an increase of 10.3% over the previous year and more than twice the level of 10 years ago. The rise in bad debts was made all too clear this week when Barclays announced that its 'impairment charges' (bad debts) had risen by 50% over the last six months to more than £1 billion, as more UK customers were unable to pay off loans and credit card debts.
| "...moving to a discounted offer could save you 1.5-2% shorter term." |
However, it's not all doom and gloom for mortgage holders. Competition between mortgage providers remains as fierce as ever; if you are currently paying the Standard Variable Rate on your mortgage then moving to a discounted offer could save you 1.5-2% shorter term, more than offsetting this week's rate rise. Because many such deals allow you to move penalty-free at the end of the discount period then it's viable to simply roll from one deal to another enjoying an attractive, subsidised, mortgage rate longer term. Alternatively, you could protect yourself from any future rises by switching to a 10-year fixed rate mortgage. These account for a tiny proportion of mortgage business in the UK but have historically been popular in the US. At the time of writing Leeds BS has the lowest rate at 4.99%.
To find out whether you can cut your mortgage payments, call our mortgage team on 020 7189 9980.