Interest rates have not budged for an incredible seven years and one could argue that we are no nearer a rate rise today
Last month a milestone of sorts was reached with the seventh anniversary of the MPC’s decision to cut the base rate to 0.5 per cent.
This is an astonishing statistic; in fact, surely nobody could have predicted that Bank rate would remain for so long at its lowest level in UK monetary history.
Yet although interest rates have not budged for an incredibly lengthy period, one could argue that we are no nearer a rate rise.
For a number of years SPF Private Clients has been consistently correct in its outlook for interest rates and our house view remains: base rate is going nowhere for the foreseeable future. If we had to be more specific, we would say an interest rate rise is highly unlikely before 2018 at the earliest and it is possible that rates will stay at current levels for the rest of the decade.
Even when rates climb at last, the process is likely to be slow with levels stabilising at 1.5 to 2 per cent – far lower than the 5 per cent or so that consumers became used to in the past.
Of course, we are mortgage brokers, not economists, but this is a gut feeling. If the MPC raises Bank rate too soon there is a huge risk that highly indebted households will be put in a vulnerable position.
The economy is undoubtedly recovering, with UK unemployment falling for more than four years, leaving a jobless rate below pre-crisis levels. Yet the recovery is still precarious and cannot be taken for granted. There are many uncertainties as far as the global economic outlook is concerned; and inflation is subdued so there is no pressure from that source to raise interest rates.
Higher wages, a fall in unemployment, cheap mortgage deals and the likelihood that interest rates will not rise any time soon – these factors are combining to boost confidence and promote growth. We expect this situation to continue for some months.
There are potential hiccups on the horizon that may foster some uncertainty, such as the EU referendum, but for many people life will go on and it will be business as usual.
On the lending front, the challenger banks are keen to do business while more established lenders are not resting on their laurels either.
Lenders have two choices if they wish to attract customers: cut mortgage rates or adapt criteria. The former has happened to such an extent that one wonders how much lower rates can go. But an easing of criteria would be helpful. While there was nothing wrong with much of the Mortgage Market Review, the execution of the rules by some lenders has left a lot to be desired. Undeniably, unintended consequences followed the MMR, particularly for those requiring interest-only or for high-net-worth borrowers, and the market is not working as well as it could.
As far as buy-to-let is concerned, the sector has taken a battering in recent times. Lenders will need to do their bit, adapting to lending to limited companies, because it looks as though an increasing number of investors will go down this route following changes to mortgage interest tax relief that will apply from April next year.
Lenders are keen to boost their buy-to-let lending, which hasn’t gone unnoticed by the Bank of England whose recent consultation paper came about amid concerns over lenders’ growth plans and how they might meet them.
The Bank is worried that lenders may relax their underwriting standards and it is proposing stricter affordability checks as a result.
These, combined with recent tax changes to buy-to-let, may slow down the sector a little but we do not expect a mass exit from landlords.
Investors are now more likely to think twice before investing and to make extra sure that the numbers add up, which has to be a positive development.
Mark Harris is chief executive of SPF Private Clients