View more on these topics

Higher rate cloud has a silver lining

Interest rates are rising throughout the world and will probably hit 6% here by the end of 2007. This is bad news for clients on fixed rates but will eventually help first-time buyers, says Frank Eve

There’s been a great deal of change in the global financial markets recently and these fundamental shifts will affect the UK mortgage market.

The big news is that returns on 10-year US government bonds broke through the 5.25% mark for the first time in five years. US interest rates are at 5.25%, so if 10-year bonds are trading at the same price it looks unlikely that short-term in-terest rates will come down any time soon. Rates are also on the increase across Europe and in New Zealand they recently hit 8%.

At home, the money markets expect interest rates of 6% before the end of the year, suggesting that the era of low interest rates for British borrowers may be at an end, for the time being at least.

The reason for this shift is connected to the global economy working not badly but too well. China, Japan and India are its main drivers and business in these powerhouses is booming.

And despite the sub-prime problems in the US, the world’s biggest consumers are still in purchase mode. There are also signs of global inflationary pressures but, perhaps most importantly, China has started to sell its US government bonds to invest in equities.

In the UK we have become blas矡bout low interest rates. They hit a low of 3.5% in July 2003, which encouraged higher levels of consumer indebtedness.

Many pundits suggest that the lack of available property and consistently high demand have fuelled rising house prices. But I believe they have more to do with the increase in borrowing power that low interest rates afforded, together with the easy availability of credit. My theory will be tested when the effect of higher interest rates kicks in.

So what does this mean for mortgages in the UK? Banks and building societies will find their long-term funding costs increase and this will lead to the disappearance of many of the competitive fixed rate deals we see today.

When fixed rate borrowers come to the end of their existing deals and look for something similar, they’re going to be in for a shock. This could lead to higher levels of arr-ears and repossessions towards the end of 2008. In turn, house price growth should slow and this will impact on volumes.

But every financial cloud has a silver lining. Even at 6%, interest rates will still be low by historical standards and growing arrears will lead to more sub-prime remortgage business.

The global and domestic economies are in robust shape, so we should still see a strong housing market, particularly in London.

And lower volumes and flatter house price inflation could be just the combination needed to bring more first-time buyers back to the market.

Recommended

MS Online readers want the plug pulled on HIPs

Despite protests from the Association of Home Information Pack Providers and Whitehall, the mortgage industry is still hostile to HIPs.A massive 86% of Mortgage Strategy Online readers believe the government should pull the plug on the packs.This week, Mortgage Strategy asks: “Has the government spent too much on advertising HIPs?” Q: Should the government pull […]

Nationwide hikes fixed and tracker rates

Nationwide has increased its rates on some of its fixed rate and tracker mortgages. The new rates are available from Tuesday June 26 2007.For home movers the new deals include two-year fixed rates starting from 5.98%For remortgage and additional borrowing customers deals include two-year fixed rate starting from 6.08%Existing Nationwide mortgage customers get a £100 […]

Lansdown Place on acquisition trail

Lansdown Place has revealed it is on the acquisition trail and plans to buy specialist IFA firms. The firm, which will open a regional head office in Bristol this week, is looking to buy firms around the M4 and M5 corridors so it can increase its geographical footprint and its number of specialist advisers. Paul […]

Don’t bank on Brown to help buyers

It’s not long now before Gordon Brown makes the short move from 11 to 10 Downing Street. The burning question is whether this will have an impact on the housing market. I’m not optimistic because Brown has not done much for the market as chancellor.

Cricket - thumbnail

England vs Australia: pensions

Well, the cricket season is here, and England and Australia are stepping up to the wicket. Although we compete with each other in the sporting world, when it comes to pensions, Australia’s pension programme is held up as a model for our auto-enrolment initiative. Auto-enrolment was introduced because people weren’t saving enough into their pensions, and it is still early days but signs are positive. However, in Australia, saving into a pension is compulsory, and in fact employers are the ones who have to pay in. Employees in Australia can make additional contributions into their pensions, but they don’t have to. Should the onus be on the employer or employee to save? Well in the UK we think it’s both, but to get ‘adequate’ savings for retirement it’s the employee who has to pay more in.

Newsletter

News and expert analysis straight to your inbox

Sign up