Short-term rate shocks should not deter buyers

Would-be buyers should not be put off by the short-term prospect of spiralling interest rates and instead adopt a long-term strategy when deciding what they can afford, according to brokerage Private Finance.

Bank of England base rate has been at 0.5% for eleven consecutive months, which has prompted some commentators to voice concerns that interest rates are set to rise rapidly.

Interest rate rises have also been touted as a tool to stem a rise in inflation as last month’s Consumer Prices Index jumped from 1.9% to 2.9%.

Yet Private Finance says that longer-term swap rates of between five and 10 years point to a less volatile environment.

Arbuthnot Latham Private Bankers puts the average five-to-ten year swap rates, used to guide the cost of mortgage funding, at between 4.5% and 5% over the last ten years.

Ashley King, head of Treasury at Arbuthnot Latham, says that this ’neutral rate’ may not have been affected by the record-low base rate.

He says: “Most lenders’ five and 10-year mortgage rates are presently building in a margin of around 1% to 1.5% over cost of funds.

“If long-term rates begin to increase, these fixed mortgage interest rates could rise to well above 6% if current margins are maintained.

“These margins will only decrease if and when liquidity – and therefore competition – return to the market.”

Private Finance has therefore urged borrowers to look beyond the threat of short-term rate hikes and base affordability on longer-term rates.

Simon Checkley, managing director of Private Finance, says: “If a mortgage based on these longer-term rates can be afforded then we see no reason why a buyer should be put off a property purchase just because there is talk of increases in inflation and interest rates. 

“Against the background of this long-term approach borrowers should look to benefit in the short-term from some of the attractive tracker rates currently available at rates as low as 2.5%.

“Just don’t use that rate as a guide to calculating what you can afford in the long-term.”