Speculation about when base rate will move has grown increasingly rampant over the last few months, causing many a mortgage borrower sitting on a variable rate to prick up their ears.
This is particularly true of the extremely large number of people that LGIM believe have been forced onto SVR because they cannot remortgage elsewhere.
However, its estimate goes well beyond the FSA’s own figure that 68% of all mortgages are variable rate, leaving open to debate just how concerned the mortgage industry should be about the situation.
Clearly, judging when base rate will definitely increase is probably best left to members of the Monetary Policy Committee (MPC), but commentators point to as early as May.
And, with the latest inflation figures showing CPI has risen to 4.4%, the pressure on Mervyn King and his counterparts to act grows evermore.
The end of base rate’s historic run at 0.5% is a prospect that could prove a boon and a bust for the mortgage industry.
It faces a potential flood of remortgage business from borrowers, with the number of fixed rate applications already on the rise, but the lack of funding and products could stymie many.
Rob Downham, principal at Simplicity Financial Services, said: “The urgency from borrowers will only come once rates rise. However, if there is a clamour to remortgage, will lenders be able to cope with the level of demand?
“Unfortunately, I think that when rates do rise lenders will price products accordingly and there won’t be that many remortgage options. Fixed rates have already begun to rise and I think they will increase quite steeply once the base rate goes up.”
Jonathan Burridge, of mortgage advice network Maan believes that even a half a per cent rise in interest rates will force many borrowers to switch to fixed rate mortgages in order to steady their finances.
He said: “I don’t think that borrowers are aware of the danger. People have very short memories and not many on low variable rates are taking the advice that they should do something with their extra capital rather than spend it on a holiday. There is a risk that, as rates rise, we will see rising numbers of people in financial difficulty.”
A particular concern is whether lenders will choose to pass on the full rate rise when it comes.
Downham said: “There are a lot of people that can’t remortgage at the moment and are at the mercy of what the lenders do. If a lender has rates 3% above base rate now, ethically, I believe that when base rate does go up it shouldn’t increase them.
“However, I think lenders will and this will put people in an artificially difficult position. Lenders will pretend to take arrears and repossessions into account, but their number one priority is to make a profit, although I like to think some building societies might be more considerate.”
Nevertheless, the CML’s arrears and repossessions forecast for this year suggests interest rates could rise but only expects a modest increase in borrower difficulties.
The CML has forecast that the number of mortgages in arrears will increase from 175,000 in 2010 to 180,000 this year, while repossessions will total 40,000 compared to 36,000 last year.
Bernard Clarke, spokesman for the CML, said: “Many borrowers have chosen to revert to variable because it was the cheapest option when their fixed rate came to an end. But it’s important for everyone to anticipate that borrowing rates will increase when the base rate rises.
“The shortage of funding is an important issue. It places constrictions on lenders and borrowers, but we are not sure what specific effect it will have.”
However, he added: “People are very well aware of the challenging circumstances that they find themselves in. Our forecasts suggest that things will be tough and there will be rate rises, but by far the majority of people will be able to manage their way through.”
Indeed, Burridge said the industry must take into account the sizeable percentage of borrowers sitting on very attractive lifetime trackers and that those taking fixed rates now are building in an “affordability cushion” that those on SVR will not have.
He added: “Circumstances for all have changed significantly and a minor difference could have a significant impact. Increased rates will encourage people to move but how quickly will depend on their circumstances. Decent brokers will already be in contact with clients.”
Perhaps it is too much to presume that the industry will see a deluge of remortgage clients the moment base rate goes up. Indeed, if more than half of people have been forced onto SVR, then it could present more problems than opportunities.
However, the key point is that rates are about to move and brokers must prepare clients who are at risk as best as they can – and as soon as possible.
