Help clients to prepare for the worst

Any adviser who minimises the effect that rising interest rates and a cooler economic climate could have on clients\' repayments should be disbarred, says Sue Read

I’m jumping on what’s almost certain to be the bandwagon of the moment. This comes with apologies because I’m guessing just about everyone else writing this week will mention it – the interest rate rise.

So we’re back up to 5%. Doom and gloom all around. Belts being tightened all over the place and Christmas looming large on the horizon covered in a thick, Dickensian fog.

Yes, it is bad news. Bad news for people on low incomes who are already finding it hard to make ends meet. Particularly bad news for anyone who has rashly taken on a mortgage far beyond their means.

Anyone who’s been sold a mortgage on the basis of 5 x income rather than by looking at what they can afford to pay or what would happen if interest rates increase. The reason we used to work from income multiples was partly that these helped to restrain borrowers from overstretching themselves, especially in an environment of potentially rising interest rates.

What short and selective memories many of us have. Any of us who have had mortgages for more that five years will have been here before. Anyone who, like me, bought their first home in the 1980s on a 100% mortgage at 14.75% variable rate (yes, that’s right) should be well aware that interest rates can rise as well as fall.

And any adviser who minimises this part of their discussion with clients – especially first-time buyers with their rose-tinted expectations of how they can afford to live on love and beans on toast – should be disbarred.

I hear many tales of woe in my daily working life. I hear from people of genuine hardships and struggles to buy a roof to keep over heads. As a parent – and as I’ve said before in this column – I am extremely concerned about how young people will ever be able to afford to get onto the property ladder.

Our problem as a nation is that we believe we have a right to buy a home – that we are somehow failures if we are tenants. Thank you, Mrs Thatcher. The fact is a person is not a failure if they do not own their own home. Most European nations have a far lower proportion of owner-occupiers than the UK.

Of course, everyone should be able to buy a home if they wish. I’m not saying that rich people should be home owners and the poor should pay rent. What I am saying is that we have to change the way we think about home ownership and our expectations in this regard. My mother blames ‘demand feeding’ for the “I want it all, and I want it now” culture we live in today. Much as I hate to admit she’s right, I can see her point.

Getting back to my point, interest rates will wax and wane in the same way as the tides do. In our professional heart of hearts we all know that to be true, but over the past few years we seem to have put it to the backs of our minds in a haze of low interest rates and house price euphoria. Clients will still want the best possible deals, regardless of climate. But they also need to check the reality that could be theirs in the future.