The minutes from the from the Bank of England’s (BoE’s) Monetary Policy Committee meeting on 6-7th August showed for the first time in three years a split of opinion between members. Two of the nine policy makers, Ian McCafferty and Martin Weale, voted to increase the base rate 25 points – raising interest rates from the record low of 0.5% to 0.75%. The remaining seven voted to keep it the same. The base interest rate has remained unchanged since March 2009.
This follows the release of official data showing inflation (CPI) falling to 1.6% in July (from 1.9% in June) against the BoE’s 2% target and the BoE expecting salaries to rise by 1.25% this year, half the growth originally forecast.
Weale and McCafferty believe that with the rapid fall in unemployment salaries would begin to rise and that increasing the interest rate early may be the best way to protect against inflation caused by wage increases. Governor Mark Carney has assured that any interest rate increase would be gradual.
Experts are debating when exactly we can expect rates to go up – some estimate by the end of 2014 whilst the majority believe it won’t happen until early 2015. What we can agree on is that rate rises are expected soon.
News for the Property Market
Since the news of rising interest rates in the near future broke, experts have been debating what effect this will have on the UK property market. Money Week published an article discussing the possible implications on the UK and especially the London property market.
The property market in the UK has thrived over the last couple of years, although a lot of this growth has been led by London – a number of regions outside of London have only seen positive growth over the last 12 to 18 months. Low interest rates have kept mortgages affordable, even in London where prices have been skyrocketing. This has also encouraged the buy-to-let property market as investors, who have been unable to access significant returns in mainstream assets have purchased properties in search of yields.
If the base rate was to rise and was passed on to mortgages, many borrowers would struggle to afford their repayments. A survey of mortgage holders by Halifax showed that if they had to pay an additional £50 each month, 13% would be unable to afford it and a monthly increase of £100 would cause 39% to cut back on other spending.
A large amount of investment into the London property market has come from foreign investors, who have been able to achieve high returns due to rapidly increasing property prices and the increased strength of the pound. Many of these foreign investors will now be keeping a close eye on the prices and could look to sell before the ‘bubble’ bursts. The political threat of increasing taxes on foreign investors, in an attempt to increase government tax receipts, could also drive them away.
Does an increase in the base rate necessarily mean that mortgages will increase? Maybe not. Banks are profiting from an increase in borrowers on the back of lower interest rates and buy-to-let mortgages are already much higher than homebuyer mortgages – there is a large profit margin in these loans for banks.
There are also much wider issues to be considered when it comes to interest rates. Household and government debt is extremely high, with inflation is needed to inflate some of this debt away – but inflation is below target and has fallen this year. With GDP per capita still well below pre-financial crisis levels, real wages failing to rise in-step with inflation and a large supply of labour from the EU there isn’t likely to be any real upward pressure on wages for some time.
There is no doubt that the base rate will rise within the next 12 months, but it will be a long time before we see rates return to the more normal levels over 3%.
The rise in interest rates will directly affect you ability to maintain your liabilities. So if you want to know how this will affect your loans and credits ask for help Credit Counseling Dallas.