Alistair Dickson: The days of low mortgage rates are coming to an end
When I first took on a mortgage, the rate of interest was 6% pa. Many will remember mortgage rates as high as 18% pa in the early 1980s.
To an entire generation of homeowners however such rates are unheard of and have never been within their contemplation. Many will have taken out mortgages in the current top end house market on fixed rate deals at rates of under 2% pa safe in the belief that rates had been at this kind of level for so long that this was where they would remain.
Currently there are economic factors in play which make me for one – now safely mortgage free – highly apprehensive for that generation.
In August, the inflation rate in the UK jumped to 3.2%, the highest rate since March 2012, up from 2% the previous month and above market forecasts of 2.9%. In September, the Bank of England repeated recent warnings about the ongoing effect of rising prices and its concerns that the UK economy was not growing as quickly out of the pandemic as had been predicted.
Despite a forecast of consumer price inflation shortly reaching 4%, no action was taken on base rates at this stage but increases in base rates in an attempt to control inflation over the coming months seem inevitable to many.
Energy price rises are an important factor in this. While these have been described as transitory in the past many commentators are now predicting that with the large numbers of insolvencies which have occurred in the UK energy supply market and more predicted for the near future a combination of reduced competitive pressure domestically and continued price rises internationally may lead to unprecedented and sustained high price levels going forward.
The UK economy also has the largely still unknown effects of Brexit to deal with which increasingly looks to be likely to be a cause of ongoing price inflation. If so gradual increases in base rate by the Bank of England seem inevitable.
The UK base rate was reduced from 0.25% to 0.1% in March 2020 to help to control the economic shock of the pandemic. It is impossible to believe that it will remain at that level much longer as base rate increases to help to control inflation come into play. Where these increases will take the rate to is uncertain but a base rate of 3% or higher is far from impossible.
Going back to the generation of house buyers with mortgage rates of under 2% pa an increase of base rates of that kind of magnitude could take us back to mortgage rates of 5 or 6% pa – which was where I came in. Increased rates will of course also apply to other items of domestic expenditure such as car loans, bank loans, HP and credit card repayments. Throw in spiralling energy prices and the possible impact of the Brexit factor, things start to look very tough indeed for UK households over the coming months and years.
Could this make for a generation of renters? The number of properties in planning via build to rent is astounding. Rental prices are currently very high due to rising demand, while BTR investors are likely to pass on some of the rising costs of construction to renters. However, as mortgage rates rise, rental offers far more flexibility in comparison so may increasingly become a more viable option.
Many people stretch to get a mortgage, while many are used to living on credit. There has to be real behaviour change as people have to be realistic when taking on a mortgage. Rates will rise and those who stretched in the first place are likely to find themselves in a lot of trouble, especially as circumstances change and commitments build.
- Alistair Dickson is director and head of Scotland at professional services company SKSi.