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Forget the baked beans. This rate rise is not the end of the world – Karasavvas

by: Lea Karasavvas, managing director of Prolific Mortgage Finance
  • 15/11/2017
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Forget the baked beans. This rate rise is not the end of the world – Karasavvas
Thank the lord that is over. Rates were being pulled faster than Lewis Hamilton’s Mercedes turns corners and clients were concerned mortgages were going to become unaffordable if they didn’t “lock-in”.

Social media nearly crashed with the historic news that the Bank of England had finally, after 10 years, increased the base rate, by 0.25% to 0.50%.

Yes folks, the rate has increased. I mean that’s it now right? Surely the world has ended. That must be it for us all. Thank the Lord, we bought seven years’ worth of baked beans. I always knew those cans of tuna would come in useful one day too.

I have my concerns the dents in my tomato soup will impact on the longevity of them, but I am hoping I have stock piled enough to see my family and I through this financial crisis that has now hit our country.

These dizzy heights that interest rates are now at is enough to scare the bejesus out of anyone. How has our economy become so bad that we are now faced with a base rate of 0.5%? Fixed money for five years now is getting dangerously close to 2%. Maybe the kids could get a job?

The absolute panic that has hit the economy is almost comical. For years we have been stress testing our clients, checking that the mortgage could not only be afforded at the pay rate but at standard variable rate too. Even in some instances at standard variable rate plus 2%. We are no longer lending eight times income, at 100% or asking our clients to self-certify their income.

Borrowers are in a good place and the reason for that is the sense and logic that returned to our industry after the crunch.

 

False economy

The panic from borrowers is born from the false economy many of them have been living in for the last 10 years. A base rate that was historically low, has led many new age borrowers to forget the times gone by when there were queues around the corner of their local bank to secure rates of 12.5%. Let’s get our head around this: 12.5%.

Now it’s breaking news that the Base Rate has risen 0.25%. It’s not a disaster really is it? Let’s take a look at the scenario. We are still blessed with ridiculously low rates. If you are panicking, then why not lock in for the long run? Ten-year fixes are out there. They are priced at a ridiculously high level though. Almost 2.5% with some banks.

Okay, I am almost choking on my sarcasm here, but I think you get the point.

Households have been living off ridiculously low rates for years and people have lost complete perspective over “rate normality” if there can be such a phrase.

The only real concern is that among such record rates, they are starting to show signs of accumulating large debt again, with credit card debt, personal loans and perhaps most worrying of all is the ease at which borrowers have secured hire-purchase finance for motor vehicles, which is what some suggest will ultimately lead to the economy’s next crash.

While borrowers will be cursing the rate rise, savers will be rewarded (eventually) when the increase is passed on. Many lenders moved quickly to increase borrowing rates, yet the increase for savers has been slightly slower.

 

Necessary evil

I think the rate rise was a necessary evil. Consumer debt has been increasing heavily: over the last year, household income had only increased by around 1.5%, while car loans, credit cards and car finance had risen by 10%.

Inflation has eclipsed the magical 3% mark and this rate rise perhaps serves as a timely reminder that rates can go up as well as down. Something that seems to have been forgotten over the last 10 years.

So, while the calm after the storm sets in I think we can all continue to sleep, and rest assured that we are not going to see incremental increases month after month.

This rate rise does not symbolise the end of the world, and the breaking of our economy, merely a reminder that the cost of borrowing can actually go up.

The reason we are asked to look at budgets, to look at stress testing, and to evaluate affordability is because sometimes, rates can go up. It’s a strange concept I know, but it can happen.

Leave those cans of beans for now. We don’t need them just yet.

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