Indeed, the other part of me can’t help but wonder why we were not having a similar level of debate prior to the referendum, rather than five months after the result was known.
As our government works out what we want from the negotiations and the level of engagement, or otherwise, with the single market, it seems that we can all anticipate rising inflation, followed by…well that’s not so clear. Ordinarily, rising inflation would eventually be met by a rising Bank Base Rate (BBR), wouldn’t it? As we neared the 2% target on inflation, we would expect the Bank of England MPC to act accordingly.
If this was to be the outlook for 2017, then you might expect customers to be looking for fixed-rate products now on the basis that a rising BBR would mean trackers were likely to become more expensive in the short-term. Thus, given the nature of today’s mortgage marketplace perhaps those who are able to secure finance, or remortgage, might well be thinking they should take advantage of some very competitive longer-term fixes. Act now, not later.
But, in all of this thinking, I was not anticipating that Mark Carney would read my mind and suggest that rising inflation wouldn’t necessarily mean increasing BBR. Quite the opposite it would seem, because last month in Birmingham, Carney effectively said that he would be quite prepared to stomach an inflation overshoot if it meant the economy gets more time to recover, and if it meant they could keep unemployment down.
In essence, the 2% inflation target is moveable and, given that most are anticipating it to rise above this level over the next two years, then there’s every chance that this particular target will be ignored before the Bank takes action.
So, what might this mean for mortgage borrowers and their advisers? It brings us back to the status quo, and a position where BBR stays put for longer, rather than subject to an inflation-fuelled rise. And, even with rising prices, our anticipation of rate rises might be put on the back burner because it seems we have a governor who sees a bigger picture; one with a huge amount of EU uncertainty to deal with in the months and years ahead. And that’s before we even mention President Trump.
Therefore, even without a further cut to BBR, there is an argument which suggests the benefits of a tracker rate still outweigh those of a fixed-rate product, arguably over a two-year timescale. After that, we are perhaps moving into longer-term product territory where the kind of longer-term fixes we are seeing available now could certainly have some real value.
So, at present, it appears advisers have a fine line to tread. Ordinarily, we might be able to detail with a much greater degree of certainty how rising inflation will impact rates, and therefore determine how the mortgage options available today might play out in the next couple of years.
But, these are far from ‘ordinary’ times. Perhaps, in that sense, the argument is made for you. Perhaps you should be grabbing the certainty now rather than waiting for the inevitable changes that are coming. But then again, change in the short-term appears to be the last thing the Bank wants to inflict on borrowers.
It is incredibly complicated and advisers must set the right expectations for their clients, whilst at the same time ensuring they understand what they are signing up for now, and how it might change sooner than they think. I wish I had all the answers but nobody does – especially not now – and it’s important that clients understand this when you deliver your recommendations and they make their choice based upon them.
