Fixing it so clients don’t go under as interest rates rise

As earnings fall and uncertainty rules brokers should consider fixed deals to stabilise borrowers’ payments


As we approach the 100th day in office for the coalition government we are beginning to get a clearer picture of its plans for the economy.

Certainly, chancellor George Osborne’s emergency Budget unveiled some pretty hard-nosed headline-grabbing plans that are likely to have a significant impact on the personal budgets of millions of householders.

The announcement of a two-year public sector pay freeze for those earning more than £18,000 proposals.

This means that teachers, police officers, civil servants, doctors and nurses will not get a pay rise until 2012.

And the picture gets worse for these workers when you consider that inflation is running at 3.1% according to the Consumer Prices Index and that VAT will rise to 20% next January.

This all adds up to a decline in real income for millions of key workers in the next couple of years.

And it’s not just pay freezes that individuals will have to contend with. There has been a marked trend towards companies reducing the hours their employees work in a bid to keep overheads down.

In fact, the number of people in part-time employment has risen in the past three months. There are now more than 7.8 million people in part-time work, and 1.1m of these are working in this way simply because they can’t find full-time employment.

Certainty of payment will be invaluable to individuals planning their household budgets for straitened times

Meanwhile, total pay including bonuses has risen by just 2.7% in the past three months – well below the CPI rate of inflation.

Taking into account all these factors it’s clear that many households face the possibility of a notable fall in their earnings – and thus in their disposable income – in the next couple of years.

So how does this affect the broker mortgage market?

Well, faced with uncertainty over employment and earnings potential individuals should be looking to make some prudent financial plans to create an element of security around their household budgeting.

With the pressure on income building one of the routes home owners or buyers should be invited to consider is a fixed rate deal over a term of, say, five years.

Despite increasing speculation that there will not be an increase in the Bank of England base rate until late 2011 the fixed rate mortgage deals currently available – while higher than some variable rates – offer a significant opportunity to protect payments in the longer term.

This sort of payment certainty will be invaluable to individuals who are planning their budgets for straitened times when household income will be under strain and variable rates are expected to rise.

While all this doesn’t necessary paint a sunny picture for workers it does offer intermediaries an opportunity to help their clients save money in the longer term by remortgaging and adding other protection products to their portfolios.

Brokers should also be well placed to present home movers and first-time buyers with a credible financial strategy whereby they can preserve their real income.