The majority of people who are currently making repayments on a mortgage or homeowner loan are currently enjoying the benefits of a cheap loan, due to the fact that the base rate of interest in the UK is at its lowest level in the history of the Bank of England.
Whilst this is very pleasant at the moment, most individuals realise that once the UK economy starts to recover, interest rates are almost certainly going to increase once again, at least back up to the level they were at prior to the credit crunch.
Most industry experts have predicted that we are unlikely to see the interest rates on our loans increase before the beginning to the middle of next year, but the latest report from the Confederation of British Industry (CBI) has predicted that recovery could happen quicker than expected and as a result of this, the Bank of England may start to increase interest rates by the end of this year, thereby pushing up the monthly cost of loans for anyone on anything other than a fixed rate.
Ian Mc Cafferty of the CBI has commented that the Bank’s Monetary Policy Committee (MPC) is likely to continue its programme of quantitative easing for the next few months in order to give a boost to the economy and help allow banks to start offering competitive loans once more, but once the economy begins to pick up fully, it will be necessary to return interest rates to some level of normality sooner rather than later.
People with variable rate loans should take this opportunity to either repay as much as possible on their loans in order to reduce the outstanding balance, or switch to a fixed rate loan whilst these remain reasonably competitive.
There has been a great deal of positive news over the course of the past couple of months or so, regarding improvements in the housing and homeowner loan markets, with more people buying property again, resulting in an increase in the number of homeowner loans being taken out.
Whilst this is all good news and a step in the right direction, it is worth noting just how subdued the markets have been over the past twelve months and also just how far there I still left to go before the loan markets return to what would previously have been considered normal.
Although lenders are starting to introduce new loan products to the market place, the majority of these are for individuals who already have a large deposit to put down, whereas the total number of available homeowner and secured loan products which offer a loan to value of 90 per cent of better has actually fallen by 97 per cent since the start of 2007 and the cost of these high loan to value products has increased significantly, despite the base rate plummeting over the same period.
Of course, the people most affected by this are first time buyers trying to take their first step on the property ladder, most of whom do not have sufficient deposit available.
Louise Cumming, of Moneysupermarket.com said “The Government has failed to get mortgage lenders to open their books to first time buyers. A 10 per cent deposit is all most first time buyers can hope to afford, so by pulling 90 per cent loan to value deals off the shelf, and increasing rates on the remaining deals, providers are keeping first time buyers out of the market, which simply exacerbates market stagnation.”
The light at the end of the tunnel for the current recession and economic slowdown in the UK appears to be starting to get a little bit brighter, as consumer confidence continues to grow and people are slowly starting to return to the housing market and thinking about making that move which they’ve been putting off for the past eighteen months or so.
There has been a dramatic increase in the number of new loans for house purchase throughout the month of April and the majority of applications are for fixed rate loan products, as borrowers take advantage of the particularly low interest rates at present.
According to the latest figures from the Council of Mortgage Lenders (CML), there was an increase of 16 per cent in new house purchase loans in April, compared with March this year, although the figures are still extremely low compared with those for previous years. Of all the new loans taken in April, 69 per cent of these were on a fixed rate basis, with an average rate of 4.83 per cent. Remortgage business, on the other hand, continued to decline as many borrowers find that their existing loan on their lenders standard variable rate is usually cheaper than any new deals which may be on offer.
Bob Pannell of the CML commented on the figures, he said “With the interest rate cycle now at its floor, an increasing proportion of borrowers are taking out fixed rates, including for longer term periods of 5-10 years. With expectations for rates to remain low in the near future, shorter term fixed rate deals are less appealing than attractively priced variable rate deals. There are tentative signs of house purchase lending stabilising, but we need to see considerably higher transaction levels to underpin house prices.”
With the base rate of interest for homeowner loans and mortgages at an all time low at the moment, many borrowers are taking advantage of the low rates and are switching their loan to a fixed rate deal for a few years.
Although the rates on fixed rate loans are currently usually more expensive than most lenders standard variable rates, the prospect of increasing interest rates in the near future has encouraged many people to pay slightly more now on a fixed rate, in order to avoid their monthly loan repayments jumping significantly upwards as and when interest rates rise.
However, Ray Boulger of the mortgage brokers John Charcol, has warned borrowers that if anyone with an existing homeowner loan is considering switching to a fixed rate deal, they should take immediate action and do it now, as he believes that rates for fixed rate loans are set to increase sharply and this could happen within the next few days.
The concerns have been raised due to the fact that there has been a sharp increase in swap rates, that is the rate at which banks and building societies are able to borrow funds from each other on the wholesale money markets and these increases in cost are likely to be passed on to customers looking for a fixed rate loan.
Mr Boulger said “I expect several lenders to increase the cost of at least some of their fixed rate mortgages over the next few days. With most borrowers currently choosing a fixed rate mortgage, if interest rates continue to rise, then the current recovery in the housing market may well wobble. The message for borrowers wanting to take a fixed rate is clear, get in now or miss out on the current relatively low rates.”
The thought of taking early retirement and finishing work at a relatively young age and being able to put your feet up with enough money to keep you going is a pleasant thought and one which many people in the UK would like to look forward to.
However, the reality of the situation is that this dream is becoming ever more distant for a large number of people, particularly those in the younger generations, many of whom have not even begun to think about retirement just yet, as people’s lifestyles and finances are currently seeing a dramatic level of change.
The Aviva group (formerly Norwich Union) has called children in the UK today “the forever generation”, as many of them will end up working much later in life, due to a lack of retirement financial planning and being forced to continue repaying higher levels of debts through personal loans, mortgages and homeowner loans. Also, as couples are now leaving it much later in life to have children of their own, a growing number of today’s youngsters are likely to have dependant children of their own still living at home with them once they reach normal retirement age.
Individual’s are also leaving it later to buy property, with many homeowners not taking out their first mortgage or homeowner loan until they are well into their thirties and due to the cost of property, many of these loans are being taken over a thirty year plus term.
At the same time we have become a nation of borrowers, with people taking on more debt through personal loans and credit cards than at any other time and along with a lack of financial planning through pensions and savings plans, a large percentage of the current young population will have nothing to retire on by the time they reach their sixties and so will be forced to continue working, when they should be able to relax.
