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How forward guidance could boost the mortgage market

  • 13/08/2013
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How forward guidance could boost the mortgage market
If the mortgage world has a pin-up, it’s Mark Carney. On Wednesday, the new Bank of England governor announced forward guidance suggesting that the central bank’s 0.5% base rate was unlikely to rise for at least three years.

After years of month-by-month uncertainty on interest rates, this is something of a revelation. But what is this likely to mean for mortgage brokers?

“In terms of dealing with customers, it is good for stability, and lenders will reduce rates,” says The Finance Planning Group chief executive Terry McCutcheon.

He expects lenders to react by cutting rates on five-year fixed-rate mortgages: “Although two-year fixed-rate products are really low, there is not that much point if interest rates are not going up. Whereas people on trackers might think, ‘I’m going to go for a cheaper five-year rate.’”

Last week Aldermore re-priced some of its five-year fixed-rate mortgage, citing sales volumes in the first half of 2013 three times that of the previous year. Product development head Mark Elden explains: “The current rate environment is an ideal opportunity for customers to look into long-term rates, especially as short-term rates are likely to stay low for some time.”

Berenberg Bank economist Rob Woods is more sceptical on whether lenders will slash rates, but he argues the announcement has had an effect nonetheless: “As the economy starts to grow – we already saw 0.6% growth and we could see anything up to 1% for Quarter 3 – this guidance will be important in keeping rates low. Without it, we would see rates start to increase.”

In May 2013 more than a third of Brits expected interest rates to rise, according to the Bank of England’s Inflation Attitudes Survey. Bearing this in mind, Woods says the forward guidance is a “very powerful” message: “It will stimulate the housing market – there is no doubt about that.”

Not everyone agrees. Former Monetary Policy Committee member Andrew Sentence suggested in The Telegraph the Bank could raise its rate as early as next year.

The economy was recovering, he argued, and if the Bank rate rose to as much as 2% it would still be extremely low by historical standards.

So what should mortgage brokers be telling clients?

Your Mortgage Decisions director Martin Wade agrees competition is likely to increase around five and ten-year fixed-rate mortgages.

But he insists the promise of years of low interest rates should not affect the advice brokers give to individual clients: “If you absolutely need security you must go for a fix. If you are looking to try and play the odds then a tracker may come out on top in the long term.”

Capital Fortune business manager Rob Killeen says the guidance does need to inform customers’ views: “However, the fundamental question of whether to fix a mortgage on the basis of requiring a guarantee still stands.”

Carney’s announcement will help nourish a fledgling housing market recovery, as well as creating an opportunity for brokers to talk to clients about longer-term fixed-rates.

But the governor has given himself a get-out-of-jail-free card. The three-year window of low interest rates could shatter if unemployment falls back to 7% or the MPC deems inflation out of control. Despite an increasingly rosy mortgage market, the continued frailty of many household finances should make independent advice more important than ever.


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