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Advisers should prepare their clients for any type of rate eventuality – Young

by: Bob Young, chief executive officer of Fleet Mortgages
  • 15/10/2020
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Advisers should prepare their clients for any type of rate eventuality – Young
The Monetary Policy Committee (MPC) has held a crucial role in the UK economy ever since Gordon Brown granted it independence from political interference back in 1997.


However, during those past 20 years, I cannot recall – even during the Credit Crunch and subsequent recession – a time when it was having to tackle some of the huge challenges it now faces.

Bank Base Rate (BBR) is central to this and even with the rate at a record low at the start of the year, it didn’t stop the MPC cutting it further to where it now currently sits at 0.1 per cent.

Part of the challenge within the mortgage market is highlighting to borrowers that a BBR of 0.1 per cent does not translate to rates of similar levels.

This is particularly when the ability of many borrowers to pay their mortgages is going to come under increasing pressure, specifically when the furlough scheme ends but even now as firms have to decide whether they can continue to function and what happens to their staff.

That said, with the BBR at 0.1 per cent there has been a growing interest in whether the next step could be for the MPC to take the rate into negative territory.

A point where it would charge banks to hold their reserves.


Advisers must explain

There appears to be a difference of opinion already among those on the MPC.

Whether this remains a step too far or not, it is indicative of the unique situation we all find ourselves in that this does appear to be a credible option for the bank.

There’s no doubting that BBR is a huge marker in terms of what is being done to stimulate the UK economy, and it’s a long way from those time periods when the MPC simply ratified the status quo month after month.

Given the talk around negative rates, advisers probably have a job to do here in terms of explaining what a potential negative BBR would mean for borrowers.

The answer is not a great deal in terms of their mortgage rates as they are still going to be in positive territory.

But if the logic above is followed through, then lenders might theoretically have a greater appetite to lend because the bank will be charging them for the money they keep on deposit.

Perhaps this could be good news for borrowers?


Be prepared

That would certainly be one of the outcomes the MPC would want to see if it dropped BBR into negative territory.

However, there is much to consider here, not least whether lenders’ appetite to lend would be shifted when we are all considering the economic impact on affordability and the ongoing ability of borrowers to pay.

Not to mention what savers will make of the situation.

It seems unlikely – at least in the short-term – that BBR will be moved below zero but this crisis has shown that those in power can’t afford to take any options off the table and they need to think the unthinkable and take decisions which would have been considered incredible just eight months ago.

We should therefore all prepare for any type of rate eventuality, and prepare our clients and borrowers for what this could mean for them, because they may be anticipating a period where their lenders start paying them, rather than the other way around.

And that simply is never going to happen.


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