Posts with tag: bank of england base rate

BoE Governor Says Interest Rates Could Rise at New Year

Published On: July 17, 2015 at 1:45 pm


Categories: Finance News

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The Governor of the Bank of England (BoE) has said that interest rates could start to rise around New Year.

This has been the strongest confirmation that policymakers at the Bank are preparing to act, as Mark Carney claimed that the decision to raise interest rates was likely to arrive at the end of this year.

For savers, this will provide long-awaited relief, as their returns have plummeted due to the financial crisis.

However, borrowers will have to pay more on their mortgage and credit card bills. The increase could also affect the housing market.

The BoE base rate is the rate that the Bank charges to banks and building societies. Carney expects this to increase slowly over the next few years.

At the present 0.5% – a record low for the past six years – it will rise gradually in the next three years and peak at around 2.5%, around half the historical average.

In a speech in Lincoln, Carney said: “The need for the base rate rise reflects the momentum in the economy and a gradual firming of underlying inflationary pressures.

“In my view, the decision as to when to start such a process of adjustment will likely come into sharper relief around the turn of this year.”

He stressed that it is almost time to act, as he said that any action taken by the BoE to steady the economy by increasing interest rates would take around 18 months to take effect.

BoE Governor Says Interest Rates Could Rise at New Year

BoE Governor Says Interest Rates Could Rise at New Year

Carney assured borrowers that any increases “would proceed slowly” and that the nine policymakers at the BoE who set interest rates would take a “feel its way as it goes” attitude to tightening policy, which will depend entirely on data.

Rates are expected to “rise to a level in the medium term that is perhaps about half as high” as the historical average of 4.5%, he said, but it will not be “mechanical”, “linear” or “predetermined.”

“Shocks to the economy and shifts in the exchange rate, for example, could easily adjust the timing and magnitude of interest rate increases,” said Carney. “Growth in the parts of the global economy that matter most to the UK is running 0.75 percentage points below its historic average.”

BoE policymaker, David Miles, said recently that it would be a “bad mistake” if policymakers wait too long to increase interest rates.1

Carney has informed MPs that UK interest rates were forecast to rise around half the pace of the US, in part due to British households being more vulnerable to the impact of higher rates.

Bank data reveals the proportion of people taking out fixed rate mortgages when purchasing a property has grown to 77% of all new UK lending, compared to 45.9% at the start of 2008.

However, the majority of homeowners with existing mortgages remain on a variable rate deal, with 57% of outstanding loans on a changeable rate.

Carney said on Tuesday that the BoE would observe developments “very closely.”

He told the Treasury Select Committee: “We will learn about sensitivity as rates begin to adjust.”

Inflation, measured by the consumer price index (CPI), dropped to 0% in June, below the BoE’s 2% target.

However, this does match the Bank’s expectations and policymakers predict that inflation will grow to over 1% by the end of 2015.

Carney told UK households to enjoy low prices “while it lasts.”1

This news arrives as house prices have reached a record high. In June, property owners and buyers reacted to the Conservative general election win by borrowing at the fastest rate for seven years.

Economists believe there was a surge in optimism as people realised their plans that were delayed due to election uncertainty.

According to official figures, the average property price in England and Wales increased by 1.1% between May and June to £181,619.

The previous high recorded by the Land Registry was £180,983 in 2007.

Separate data reveals that this growth coincides with a substantial rise in the amount of money borrowed as mortgage debt.

Borrowing increased to £20.5 billion in June, a 29% monthly rise and the highest level for that month since 2008.

Economist for the Council of Mortgage Lenders (CML) – that compiled the data – Mohammed Jamei, says the June figures were “flattered” by the end of election doubt.1

Housing Economist at Halifax, Martin Ellis, adds that there was a “noticeable spike in optimism” after the result.

He continues: “A key factor in maintaining optimism over house price growth has been the fact that the stock of homes available for sale is currently at record low levels.

“If this growth is to be sustainable then we need to see a comprehensive house building plan rolled out across the UK.”1 

However, experts warn that once this election bounce is out of the way, the pace of growth will calm down.

Head of Lending at the Mortgage Advice Bureau (MAB), Brian Murphy, concludes: “Homeowners are still benefitting from a significant uplift in the value of their properties, but there are encouraging signs that the market is returning to a more stable footing.”1






Why Now is a Great Time to Buy a House

Published On: February 11, 2015 at 3:22 pm


Categories: Finance News

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Experts reveal that the next six months could be the best time ever to take out a mortgage.

They say that competition between mortgage providers make it a great opportunity for buyers or those remortgaging.

Fixed-rate deals are the cheapest they have ever been, and could even drop below 1%. Variable rates have around halved in the last year to 1.64%.

The Mortgage Advice Bureau’s Brian Murphy says: “The next six months are shaping up to be the best ever window to secure a low interest rate if you are looking to buy or remortgage. Today’s prices have never been bettered in modern times and given that a base rate rise is inevitable at some point, it is unlikely they will be surpassed in the years ahead.

“Lenders have begun the year with a strong appetite for growth, and newcomers are going head to head with established names to launch attractive new deals.”1

Figures from the Bank of England (BoE) reveal that an average two-year fixed rate has declined from 2.37% to 2.01% in the past year.1 On a £200,000 mortgage with a 25% deposit, £420 a year would be saved.

For the same mortgage on a five-year fix, which has dropped from 3.34% to 3.09%, £300 a year could be saved. A typical variable rate has also fallen from 2.74% to 1.64%, cutting £1,300 off yearly repayments.1

Lenders decreased their rates due to economists advising that the BoE will keep its historically low base rate of 0.5% until next year.

With new banks entering the mortgage sector, competition has risen and rates have dropped further.

Andrew Montlake, mortgage broker at Coreco, explains: “We are now seeing rates fall to a level that once seemed unthinkable. Mortgage lenders are in the midst of a rate war, which shows no sign of abating soon, as they battle it out for business.

Why Now is a Great Time to Buy a House

Why Now is a Great Time to Buy a House

“With new lenders coming into the market and competition intensifying we could even see these offerings fall a touch lower. The next few months could well prove to be the best time to lock into low rates which may not be seen again for a generation.”1

Montlake does warn though that these low rates can come with high one-off fees.

Despite cheaper mortgages, spiralling house prices are still causing home ownership to be far off for many. Prices around the UK increased by 10% in the last 12 months, and 15% in London. The average property is now £271,000 or £501,000 in the capital, found the Office for National Statistics (ONS).1

Homelessness charity Shelter’s Campbell Robb says: “Despite talk of mortgages being at an historic low, it certainly doesn’t feel like that for many young people and families for whom buying their own home remains a distant dream.

“Sky high house prices mean families working hard and saving what they can can’t even come close to affording a home of their own. The only way to tackle our housing crisis is for politicians to build the affordable houses we urgently need.”1

Furthermore, mortgage rates for those with low deposits of 5% or 10% are also at record lows.

Despite these reduced rates, aspiring buyers will still have to pass thorough affordability tests, which were introduced by the Financial Conduct Authority last April.

The Mortgage Market Review requires lenders to enquire about applicants’ incomes and spending habits to ensure that they could still afford their repayments if interest rates were to increase sharply.

Last June, the BoE advised that no more than 15% of new lending went to high-risk loans, those worth over 4.5 times the buyers’ income.

Both of these factors affected the mortgage market initially, as providers were hesitant to lend. However, they have since adapted to the restrictions, and the industry is booming. Lenders are competing for customers and offering deals to those with low deposits.

Low-deposits have been supported by the Government’s Help to Buy scheme.

Banks can provide mortgages at such low rates as they have a pot of cash to loan out of from the Funding for Lending scheme. This system was introduced in 2012, and allows banks and building societies to borrow cheaply from the BoE, on the condition that they use some of the funds for mortgages to homebuyers.

Borrowers are reminded that they must still undergo affordability checks before a loan is granted.


The Difference Between Inflation and Base Rate

Published On: January 21, 2015 at 2:18 pm


Categories: Finance News

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The Difference Between Inflation and Base Rate

The Difference Between Inflation and Base Rate

Inflation, and the Bank of England (BoE) base rate are not the same thing. However, the BoE may use, and do use, the base rate to influence inflation.

The base rate is the measure that the Bank uses to calculate how much they charge to lend money to other financial institutions. This then impacts the interest rate that these institutions charge the public and businesses to borrow from them.

For example, if inflation is particularly high, then the BoE may increase the base rate, which will filter down to the public in the form of higher interest rates on any borrowing. This will then slow down public spending, as the public are paying more for their debt, and therefore have less money to spend elsewhere.

If inflation is very low, or negative (deflation), then the BoE may lower the base rate. This would mean that financial institutions can borrow money from the Bank at lower rates, and therefore should be able to lend the public money at lower rates. With the general public spending less on debt, they will have more money to spend on other things, and inflation will rise.

Currently, inflation is very low, but the base rate is also at historic low levels, so the Bank has less room for movement. Additionally, the mortgage sector often sees the biggest result in lowered interest rates. Most of the public’s debt is in mortgage form, and as certain areas in the country are seeing a small house price boom, lowered base rates would further drive that.