Interest Rate Rise Winners and Losers

london property

Like most news about the property market, the recent change in Interest rates has resulted in a flurry of news stories and opinions. After 10 years of low interest the base rate — the interest rate on which others are based — went up from 0.25% to 0.5%.

Is it really good for savers and bad for borrowers? Lets take a closer look.

SAVERS

The Mirror recently reported on Mum of three Francesca De Franco – one of millions of savers who are better off after the base rate rise.

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She has savings of £5,000 with Yorkshire Building Society, which is passing on the increase. The 38-year-old, from Banstead, Surrey, will see the interest rate rise from 0.5% to 0.75%. Over a year on her £5,000 balance, that would be a 24p-a-week increase, so her annual gain will go up from £25.06 to £37.54.

But let’s be honest , nobody realistically sees Saving as a viable option and nor should they. Money should always be invested… in stocks, in property, in something that basically yields better results. Even as little as a few thousand should be carefully invested.

Besides, banks have already demonstrated a reluctance to pass on the rate. Virgin Money actually cut savings rates on one of its ISAs on the same day that the Bank of England was raising rates.

So this is not a win for Savers.

BORROWERS

By contrast, lenders have been quick to raise the cost of mortgages. Most customers with tracker mortgages have seen an immediate rise of 0.25%.

Nationwide building society has just under 500,000 borrowers on its “base mortgage rate” of 2.25%, which will rise to 2.5%. Assuming the homeowner has a 25-year term, the monthly cost of a typical £175,000 Nationwide mortgage will rise by £22 a month, to £785 (see table).

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So far 20 banks have announced increases to their Standard Variable Rate (SVR) mortgages, including Barclays, Halifax, Lloyds, Nationwide, Santander and TSB. HSBC, Royal Bank of Scotland and NatWest are still considering their plans.

However, analysis by independent think-tank Resolution Foundation found that only 11 per cent of British households will actually be affected. This is largely because fewer people own homes and more people hold fixed rate deals.

The impact on buy to let will be more onerous as these loans are almost entirely interest-only rather than the repayment mortgages demanded of conventional homebuyers. A 0.25% increase in a £200,000 interest-only loan results in a £40 extra monthly cost compared with £25 extra on a repayment mortgage.

Again, this is no real win for borrowers either.

SO WHO WINS?

For now there are no winners, and those losing are not losing by very much.

I had a client call me earlier this week concerned about their mortgage repayments and what this spells out for them. As it turns out, not very much more than whether he wants that double shot in his coffee or not.

The rate rise not about winners or losers. It’s about keeping it all going in the healthiest way possible – by this I mean our economy, the housing market, consumer debt etc etc. We have had an unprecedented period of low interest rate that have a fuelled a debt bubble.

I see the recent rate rise as a necessary and somewhat negligible change that will keep us from a catastrophic bust last seen in 2008. Property must be self correcting and a softening, if indeed you argue this is what will be the result, only helps us avoid bigger problems of property bubbles in the near future.

Mark Carney, Governor of the Bank of England, has indicated that he expects two more increases of 0.25 per cent over the next three years, so it is worth considering switching to a fixed-rate deal.

More rate rises are anticipated, at which I would probably start putting your drink down to have a think. For now rates are still very low, so we can be somewhat ambivalent about the news and it’s impact on our lives.

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