As the UK economy edges towards an interest rate rise, who matters more: savers or borrowers?
Association of Mortgage Intermediaries chief executive Robert Sinclair
It is now perceived wisdom that the only way for interest rates is up. This is despite the original Bank of England policy being that QE would be unwound before increasing base rates. That assurance has been quietly dropped.
The issue for most banks and building societies is what action they should take. It has to be said that, for the past two years at least, many institutions have been putting the interests of their borrowers before those of depositors.
There had been a steady reduction in credit interest rates on both existing and new products. The cynic in me might almost think that rates have been dropped so that, when the base rate increases, this can be passed on in full to savers, but without the impact on full-year bottom-line and net interest margin that would otherwise have prevailed.
Of course for borrowers, the rates that they pay on their mortgages are predicated on Libor and swap rates, not on the underlying Bank of England base rate. So what will be passed on?
For those on fixed mortgage rates there will be no difference, until they come to the end of their initial rate period with all the consequences of potential rate shocks and facing the more daunting post-MMR affordability rules. Those on an SVR will probably face an increase but it is likely to be less than the first two 25 basis point increases. I think we will see as few as 30 of the first 50 point increases passed on.
This continued desire to support the mortgage market is at the expense of depositors. They will see an increase in savings rates of a similar amount, so maintaining the firm’s net interest margin.
It remains to be seen how the MPC will view all of this as it is seen as a tool to squeeze inflation out of the economy.
But it increases income in the hands of depositors and will not substantially affect borrowers. The bigger impact is on business, which needs to fund pay increases to keep the merry-go-round alive.
Building Societies Association head of mortgage policy Paul Broadhead
The simple answer for building societies is that both groups matter and are of equal importance. Providing to members a rate of return on savings, which are then lent out as mortgages, is how building societies have done business for hundreds of years.
There is no doubt that, for those borrowers with a suitably sized deposit or sufficient equity in their property, the past six-and-a-half years have been a golden period for mortgage deals, the likes of which we may never see again.
The Q2 2015 figures from the Mortgage Lenders and Administrators Statistics show the average interest rate on gross advances to be at a historic low of 2.83 per cent. With the Bank of England’s base rate at 0.5 per cent since March 2009 – the lowest it has been in the Bank’s 321-year history – it has been another story for savers.
Until the recent falls, finding a savings rate that beat inflation has been challenging. However, BSA members continually compete for the best-buy tables and provide some of the most keenly priced products in the market.
Both Coventry and Leeds, at the time of writing, have Isas north of 2 per cent.
But there is a limit to how high savings rates can go in the current market environment.
The BoE has trod a delicate path over the past six years and it is easy to forget that, combined with a total of £375bn in quantitative easing, the 0.5 per cent Bank base rate and even the Funding for Lending Scheme, the market remains propped up.
Inflation is near zero and, at the latest Monetary Policy Committee meeting, it voted by a majority of 8 to 1 to maintain Bank rate at 0.5 per cent.
Minutes from the previous meeting included evidence from mortgage lenders that a rise in funding rate costs could soon lead to an increase in mortgage rates.
That evidence backed up the Q2 2015 Credit Conditions Review that found that most major UK lenders did not expect mortgage interest rates to fall much further.
In terms of when interest rates will start to rise, many a market commentator over the past six years has made foolhardy predictions about the first base rate rise – and I am not going to start now.
The market continues to take a punt when it comes to the base rate rise – in the short term, William Hill has cut its odds for the base rate to remain the same until 2016 from 8/13 to 4/7.
So while the status quo may look like a safe bet, I would argue that, for the time being, my £5 would still be better spent on Northampton winning 2-1 away against Morecombe this weekend.