The Bank of England pledged rate rises would be ‘gradual and limited’ then threw a generation of homeowners under the bus
Not so long ago, the Bank of England repeatedly pledged interest rate rises would be ‘gradual and limited’. Instead, they’ve been sudden and brutal.
Those reassuring words were aimed at the generation of borrowers who had no choice but to borrow huge sums of money if they wanted to own a home in the cheap money era of massively-inflated house prices.
Given the choice many would have opted for lower property purchase prices and higher interest rates, but that wasn’t on the homeowning menu.
The Bank of England put quite a lot of effort into putting this don’t worry narrative forward: stick ‘interest rates gradual and limited’ into a search engine and you’ll see plenty of results featuring Mark Carney and friends.
For more than a decade after the financial crisis, interest rates were kept super low, cheap money was pumped into the financial system, and property prices were allowed to become increasingly detached from wages.
Many people were concerned about this, but the mantra in return was not to worry, as in a low interest rate world those super-sized mortgages were affordable – and rates would only rise gently and slowly.
We now know that interest rate rises have been the exact opposite of that.
From gradual and limited to sudden and brutal: The Bank of England spent years reassuring borrowers that rates would eventually rise gently and then did the exact opposite
We’ve gone from a 0.1 per cent to a 5 per cent base rate in 13 consecutive rate rises over just 18 months.
As the Bank of England belatedly plays catch up with sky-high inflation, it has flipped its position and is now crushing a swathe of big-mortgaged homeowners, largely those in their 20s, 30s and 40s.
I know this generation well: it encompasses me, my friends, my younger siblings and their friends, and many of my colleagues. (I also know well those of the same generation stuck paying rising rents, who’d much rather own their home.)
And a peril of my job is that often what people now want to talk to me about is the mortgage car crash that’s either hit them or is about to.
It’s the sort of pain that is hopefully a once in a generation event – the last time this happened was when rates rocketed in the late 1980s.
Base rate is much lower now, but analysis by Neal Hudson of Built Place has highlighted how due to bigger mortgages compared to wages, 6 per cent now is the equivalent of 13 per cent back then.
The average two-year fixed rate is now comfortably above 6 per cent at 6.75 per cent, having this week achieved the dubious honour of rising higher than the mortgage rate peak after the mini-Budget, delivered so disastrously by Liz Truss and Kwasi Kwarteng.
Mortgage rates are climbing as base rate expectations and gilt yields continue to rise and this week the Bank of England laid out the pain being inflicted.
Its Financial Stability report revealed that over 1million homeowners face a rise in monthly mortgage payments of more than £500 a month. For a higher rate taxpayer that equates to £10,000 of salary just to cover the extra monthly cost.
Bank of England figures show how payment shocks are expected to hit with more than 1million borrowers will end up paying an extra £500 per month or more on their mortgage.
The Bank also revealed how the interest rate pain doled out to tame inflation has been shifted onto a smaller proportion of the population, as the percentage of mortgaged homeowners has shrunk.
It also hits in a different way to the 1980s and 1990s, when borrowers were stretched on the rack as rates rose each month and their variable rate mortgages immediately passed that on.
Now people are protected by fixed rates until suddenly the shock hits them like a train, with payments suddenly jumping hundreds of pounds.
Today’s mortgaged homeowners will have their finances permanently affected. The Bank of England owes them an apology
So far, homeowners have weathered the storm surprisingly well, but there is a suspicion that some of that may come from rate rises being so rapid that the full effect hasn’t filtered through yet.
Hopefully, arrears and repossessions will stay low and the late 80s and early 1990s housing crash won’t be repeated. But even if it isn’t, today’s mortgaged homeowners will have their finances permanently affected.
The Bank of England owes them an apology.
‘Gradual and limited’ turned out to be empty words and the Bank compounded the issue by getting it totally wrong on inflation and low rates, with its ratesetters failing to act sooner.
There were plenty of flashing red lights that interest rates didn’t need to remain at their initial lockdown emergency level
In May 2020, we ran an article from one of them, Pete Comley, warning of an inflation wave and asked: Will the coronavirus crash lead to a double-digit inflation spike?
Inflation has been a global problem, but the Bank of England and government didn’t help Britain get on the right side of it.
The Bank of England was printing money, the government was chucking it straight at people through furlough and other schemes, and ratesetters ignored calls to get base rate off the floor for too long.
Unfortunately, now we are seeing the effects of that. The silver lining to the current cloud is that markets are likely to be running ahead of themselves, as they often tend to do.
Base rate may not get as high as currently forecast and some decent inflation figures could swiftly change expectations.
Meanwhile, spiralling mortgage rates are also a product of lenders trying to throttle demand by repricing upwards.
These things could change and mortgage rates could steady and then come down sooner than expected.
The problem is that even if that happens, for a large chunk of a generation of homeowners the damage has already been done.
Article sourced from https://www.thisismoney.co.uk/money/mortgageshome/article-12296249/The-BoE-said-rate-rises-gradual-limited-brutal.html
Mc Daid Mortgages do not accept responsibility for any advice provided or opinions expressed with this article. This is for information purposes only
Your home may be repossessed if you do not keep up repayments on your mortgage
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