If anything came out of the Budget, it was the message that interest rates are likely to stay at rock bottom for some years to come.
The chancellor George Osborne spoke about giving ‘families planning their futures, and businesses wondering whether to invest, more confidence that interest rates will stay lower for longer’ by enhancing the powers of the Monetary Policy Committee.
When Mark Carney takes over as Governor of the Bank of England in July, the MPC will have much more flexibility and the potential to issue explicit guidance on the likely future path of interest rates, along the lines of the US Federal Reserve.
While the 2 per cent inflation target will still need to be met, the MPC will have more leeway when it comes to using unconventional measures to support the recovery.
Such measures will make it easier for the Bank to keep interest rates low – something that will distress savers further but will be music to the ears of hard-pressed borrowers.
The chancellor also spoke about the success of the Funding for Lending Scheme and proposed to extend it. This makes a lot of sense as the FLS is starting to work and make more funding available at cheaper rates. But while he mentioned that the FLS would help first-time buyers if lenders ensure funds reach them, it might be reasonable to go further and to force this. The reality is that the FLS has been good at making cheap mortgages for those with large deposits cheaper still. More needs to be done to help those borrowers who require high LTV mortgages.
The Help to Buy initiatives were a welcome surprise. It was good to see some positive measures aimed at the housing market, rather than further attacks on wealthier homeowners akin to the measures delivered in recent Budgets.
Help to Buy should provide a significant boost for the housing market although more detail is still required, particularly on the guarantee side of things.
It is also welcome that second steppers can now benefit from an interest-free equity loan, as well as first-time buyers. There are many people trapped in their homes, who bought at the top of the market but now have very little equity and who need to move because they demand more space for a growing family. Under Help to Buy they should be able to do so. Being able to buy a property of up to £600,000 should also ensure that those living in London and the southeast can afford a decent-sized home. We welcome the news that this element of the scheme will be launched from next month as there really is no time to lose.
Effectively, a Government-backed mortgage indemnity guarantee, introduced next year, will enable lenders to offer high LTV mortgages while mitigating their risk. We have been calling for an extension of the MIG scheme for some time as something that would make a real difference to first-time buyers, and the fact that the Government is supporting £130bn of mortgages over three years is welcome. However, the capital relief issue is still unresolved and the pricing of the insurance policy will also need to be keen to make it commercially viable, as well as making it attractive to borrowers.
Despite the many positives, there are fears that Help to Buy will be open to abuse and could inadvertently benefit the wrong people, namely second homeowners or those who have sizeable deposits but decide instead to put down a minimum deposit of 5 per cent and divert the rest of their funds elsewhere. The government has excluded landlords from the scheme, rightly deducing that this would be a PR disaster and further anger those who feel that buy-to-let is responsible for many of the problems we face in terms of a shortage of homes. But there are other people and areas that need to be monitored. The government needs to get a clarification document out quickly to ensure that any potential loopholes are closed. It may also have made sense to consult more widely beforehand so that this didn’t happen in the first place.
The Budget’s recovery plan gambles on house prices booming again. There are fears that Help to Buy will indeed fuel another house price bubble, with its lack of emphasis on the need to build more homes. But while these outcomes remain uncertain, what is highly likely is that interest rates will not be edging upwards from 0.5 per cent for some years to come.