Homeowners should prepare for interest rates of 5pc, warns Bank of England markets chief Paul Fisher

Homeowners should start preparing for interest rate rises ahead of a return to “normalised” levels of around 5pc, a senior Bank of England official has warned.

In an interview with The Daily Telegraph, Paul Fisher, the executive director of markets and a member of the rate-setting Monetary Policy Committee (MPC), said central bank policymakers would like rates to increase as much as tenfold from their current historic low of 0.5pc as soon as possible.

“We hope people are aware that interest rates at some point will go up again and that they will head back to a normalised position,” he said. Confirming that “normalised” rates would be “around” 5pc, he added: “What we need to do is to trigger the mindset in people that that’s where rates will eventually go back to.”

Paul Fisher interview - the full transcript

His comments came as minutes from this month’s MPC meeting suggested that policymakers are already considering rate rises to stave off the risk of soaring inflation. “Most of those members considered that the accumulation of news over recent months had probably shifted the balance of risks to inflation in the medium term upwards,” the minutes noted.

Market expectations have also jumped in the past month, with rates in two years’ time now forecast to be 2pc rather than the 1.5pc being predicted in November.

Mr Fisher’s warning follows a stark Bank research paper indicating that more than 7m homeowners are at risk of rate rises. Two thirds of mortgage borrowers are currently on variable rates, it found, compared with roughly half in a typical year. On current wages, if rates were at 5pc, households would be spending more of their disposable income on debt interest than at any time in the past 20 years, the Bank’s analysis showed.

According to separate Bank data, variable rate homeowners are paying interest of 3.28pc on average compared with 4.34pc for those on fixed rates – equating to a £1,600 annual saving on a £150,000 mortgage. Household debt in the UK is £1.45 trillion, of which £1.2 trillion is mortgage borrowing.

Mr Fisher stressed that he had no timetable for rate rises, as any decision “will be conditioned on economic growth and prospects”, and that the Bank would proceed cautiously. “We would put rates up, see what the effect is and then judge how quickly to go,” he said. “I don’t think a change of 25 or even 50 basis points is going to trigger a recession.

“Obviously the first time we raise base rates that will be a big signal to people. But you’d like to think independent financial advisers and others will be bringing this home to people when they are arranging their mortgages and other borrowings.

“We have to bear in mind savers have being doing particularly badly while borrowers have been benefiting. We can’t favour one group over another.”

One MPC member, Andrew Sentance, has been voting for a quarter point rate rise since June. Yesterday’s minutes for the December meeting noted that he had reiterated that “a gradual withdrawal of monetary stimulus by raising Bank Rate was justified by recent economic developments”.

Mr Sentance remained the lone voice on the committee calling for a rise, with seven members choosing to hold rates and leave unchanged the £200bn of quantitative easing (QE) – or money printing, and one member voting for a £50bn increase in QE. It was the third consecutive month that the committee had been split three ways.

Economists noted that the MPC’s tone had changed dramatically since November. Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club, said: “Reading between the lines it appears that the appetite for further quantitative easing has almost totally disappeared and, in this regard, the tone has become more hawkish.”

Vicky Redwood, senior UK economist at Capital Economics, added: “There is clearly a risk of a token rise in interest rates next year, especially if inflation expectations pick up further.”

Despite his rate rise comments, Mr Fisher warned that the recovery could suffer a temporary setback next year. “It’s not impossible that we would see a quarter of negative growth,” he said. “The output growth of UK tends not to be that volatile quarter to quarter but in this sort of situation when you are recovering from a deep recession it is not impossible.”

He added that the biggest risks the UK faces are how external –a fresh crisis in the sovereign debt markets, a spike in commodity prices or a collapse in US growth.

Interest Rates must rise warns business group

The Bank of England will have to hike interest rates by at least 2 percentage points over the next two years, business leaders have warned. It believes rates will start to rise in the New Year.

In total, interest rates will need to jump from their current low of 0.5% to 2.75% by the end of 2012, in order to cope with rising inflation, the Confederation of British Industry said.

Such a rise would put nearly £200 extra on monthly payments of a typical £150,000 floating interest rate mortgage.

Taken in conjunction with Nationwide’s prediction of a 10% drop in house values for next year, that would be thoroughly bad news for home-owners.

According to the Bank of England, two-thirds of UK borrowers are now on floating interest rate deals, and the proportion is rising.

Ian McCafferty, CBI chief economic adviser, said that the ‘persistent strength’ of energy and commodity prices was a growing concern and was pushing up the cost of living.

According to the CBI, inflation as measured by the Consumer Price Index – which was 3.3% in November – will hit 3.8% in the first three months of 2011 and will stay well above the Bank’s 2% target for two years.

The CBI also downgraded its forecast for UK economic growth in the first quarter of next year. The group expects growth of 0.2%, down from 0.3%, as the fall in public sector spending and higher inflation drag the recovery.

The group stressed that it does not expect Britain to slide back into recession, although it does forecast higher unemployment.

UK to avoid double dip in 2011, but Base Rate will be going up

The UK economy will escape a "double dip" next year, but households face a tight squeeze on living standards, according to the Confederation of British Industry (CBI).

With a hike in VAT to 20% coming on 4 January and consumer confidence hitting record lows, ministers will be concerned the UK's fragile recovery could be derailed by renewed crises in the eurozone.

A sluggish property market and a drop in average house prices of 4% in 2011 completes the gloomy economic outlook, the paper writes.

The CBI said that the Bank of England will need to raise interest rates further and faster than previously thought, because of the impact of rising world commodity prices on inflation.

The bank rate, which currently stands at 0.5%, will be 0.75% by the spring of next year the CBI said, rising steadily to 1.25% this time next year and to 2.75% by the end of 2012.

Even at such levels, however, rates would be low by historical standards. The upward trend in rates will put additional pressure on the seven million mortgagors on variable rate deals linked to the Bank rate, adding hundreds of pounds a month to mortgage repayments.

In its latest economic forecast, the employers' organisation sees inflation peaking at 3.8% in the first quarter of 2011, on the consumer prices index (CPI) measure. On the retail prices index (RPI) measure, which also takes account of accommodation costs, inflation will hit 5%.

But "despite many risks to the outlook, and a forecast of particularly fragile growth at the beginning of 2011, the UK recovery is expected to be maintained", according to the CBI, which "still considers the risk of a double dip back into recession to be low".

Home owners threatened by rising interest rates

The Telegraph reports today that in its Financial Stability Report, the Bank of England says that two thirds of borrowers are now on floating interest rate deals and the proportion is rising.

If rates go up next year, as some analysts suggest they will to combat rising levels of inflation, these home owners will see an increase in their monthly mortgage payments.

More could find themselves unable to afford their repayments, the Bank’s report warns.

Often, people automatically end up on their lender’s standard variable rate once the term of their initial fixed-rate deal has expired and they are unable to find an alternative affordable loan elsewhere.

There are also some home owners who have made the decision to stay on their lender’s standard variable rate as it is cheaper than remortgaging or because they are unable to remortgage due to tough lending criteria imposed by banks.

Many risk becoming so-called “mortgage prisoners” – trapped in their homes, unable to move, because of the cost of borrowing.

At the height of the credit crisis in 2007, there were 11.4 million outstanding mortgages, according to the Council of Mortgage Lenders. Less than half of these – approximately five million – were on a floating rate, such as a tracker mortgage or a lender’s SVR.

Almost seven million borrowers – or 57 per cent – had a fixed rate deal. But many of these initial deals are coming to an end.

In its report today, the Bank warns that around two thirds of outstanding mortgages – equivalent to 7.2 million – are now variable rate deals.

“Currently, around two thirds of outstanding mortgages in the United Kingdom have floating interest rates, somewhat above the average over the past five years,” the Bank says. “That proportion is rising as mortgagors move on to standard variable rate products as existing fixed-rate deals expire. This exposes more households to the risk of increases in interest rates.”

The Bank goes on to warn that a rise in rates could result in more home owners being unable to afford to repay their loans.

It says: “Given current levels of debt, UK banks might face higher defaults if interest rates were to rise rapidly from current levels or if income and employment were to fall.”

The Bank of England is under pressure to increase the Bank Rate from its historically low level of just 0.5 per cent amid a jump in inflation.

The Consumer Prices Index, the Government’s preferred measure of inflation, rose to 3.3 per cent in November, up from 1.9 per cent a year earlier.

Today’s report warns that if the Bank Rate rose to 5 per cent, and banks maintained their current profit margins, households would spend more of their disposable income on mortgage interest costs than at any point in the last 20 years.

Families would need to reduce their debt by 15 per cent to reduce their interest payments to long-term average levels.

A 1 per cent rise in mortgage rates would see the monthly repayments on a typical £150,000 mortgage increase from £909 to £989.

A small increase in mortgage rates on top of all the other inflationary pressures that households are facing could be enough to tip some people over the edge.

Economists have warned that inflation will remain high next year, leading to a rise in interest rates.

Vicky Redwood, a senior economist Capital Economics, said: “The combination of tax rises, high inflation and public sector job losses make for a pretty nasty backdrop at the start of next year.”

Howard Archer, an economist at Global Insight, said: “The Bank of England could raise interest rates earlier in 2011 than currently expected. However, we suspect that most Monetary Policy Committee (MPC) members will be willing to hold off from raising interest rates in the near term at least while they wait to see how well the economy holds up as major fiscal tightening increasingly bites in 2011 starting with January’s VAT hike.

“The MPC are also likely to be soothed by current ongoing evidence of wage moderation. We continue to lean towards the view that the Bank of England will not raise interest rates before the fourth quarter of 2011.”

Charities warned earlier this week that home owners are falling behind with their mortgage payments at an alarming rate and that more people would lose their homes next year.

Sarah Beeny's predictions for the buy to let market in 2011

Sarah Beeney – Tepilo / C4’s Property Ladder

“I think at the moment we are still bouncing along the bottom of the market, and price rises shouldn’t be too dominant for some time, but also won’t fall much either. If you need to sell I would suggest you get going now or in the New Year.

"If you haven’t found a property you want to buy, then there’s no point in buying anything until it’s the right one – the cost of moving can be as much as 10% these days. Property is most definitely still selling! The most important thing to remember in this climate is to remain calm. 

"Do all you can to not take into consideration headline scaremongering of a predicted 14.7% drop in values in one newspaper one day or a 16.4% rise in another newspaper the next – why not 13.9% or 15.8% as they would be likely to be as accurate?  If you have to sell for less you can more than likely buy for less too.

"The truth is you need to keep both feet on the ground and get finance you can afford to pay off and a property that will suit your needs for the next few years. If you are selling be realistic about how much you can sell for and you will get a buyer and of course save yourself thousands of pounds by using http://www.tepilo.com/ where it’s free to sell.”

Fixed rate selection increases for fourth month in a row

The number of people choosing fixed vates over variables has increased for the fourth month in a row, the latest Mortgage Advice Bureau/Coreco National Mortgage Index reveals.

It rose from 63.6% in October to 65.7% in November.

This compares with just 46.3% of applicants choosing fixed rate deals back in January 2010.

But the number of people choosing fixed rate mortgages is significantly below the 90% who chose fixed rate over variable rate products back in May 2009, at the end of the raft of interest rate cuts by the Bank of England.

The average LTVs on purchase mortgages dropped slightly from 70.4% in October to 70.1% in November.

Meanwhile, the average loan size for purchase mortgage applications increased from £123,982 in October to £126,162 in November, a rise of 1.8%.

The average deposit put down by a purchase mortgage applicant in November was £37,722 compared to £36,699 in October.

In terms of total mortgage applications, both purchases and remortgages, activity was up 23.4% for the year to date compared to the same period in 2009.

The average LTV on remortgage applications rose only marginally from 55% in October to 55.1% in November.

The average remortgage loan size increased by a substantial 27.5% in November to £166,899 compared to £130,913 the previous month.

Brian Murphy, head of lending of Mortgage Advice Bureau, says: “Consumer confidence is relatively low due to still uncertain economic and employment conditions and therefore borrowers are increasingly opting for the security that fixed rates offer.“The purchase market recorded a slightly surprising but welcome small increase in activity during November over October.“Having witnessed a fall in October from September followed by last month’s increase this reflects the slightly disjointed nature of the current market as generally at this time of year purchase market transactional numbers would be falling month on month.”

Low interest rates make property a strong investment for 2011

Low interest rates make property a strong investment for 2011

The number of respondents benefiting from low interest rates is at a seven month high of 71%.

Results from the November confidence tracker survey carried out by the Worldwide Property Group reveal that the number of respondents benefiting from low interest rates is at a seven month high of 71%, which could explain why the company has recently seen increasing interest in property investment.

Interestingly, for the second month in a row, respondents remain equally divided between whether interest rates will rise or stay the same.

Of those that that did predict a rise, 93% believed the base rate would not exceed 1% within the next 12 months.This is excellent news as it is highly possible that current low interest rates have been a major catalyst for increasing interest in buy-to-let.

This is re-enforced by the fact that 84% of respondents are of the opinion that right now is a great time to invest in UK property.

Looking at overseas property, year on year comparisons have indicated that there has been a 26% increase in the number of respondents who believe now is a good time to make a foreign property purchase, and even more significantly a 21% increase in respondents who are actually considering making a foreign property purchase.

This month Spain continued to ride high as the most popular overseas location in which to buy with nearly a third of respondents saying they would consider a Spanish property purchase. The United States also ranked highly with one in five stating their interest in American property.

Kevin Wilkes, Managing Director of the Worldwide Property Group said:“Once again this survey reveals the confidence that people have in property. Even though it has faced strong headwinds the market has demonstrated remarkable resilience and surprising stability. Improved affordability in large part due to low interest rate levels has reignited interest in buying property in the UK, whilst around the world many locations such as Spain and the USA now offer rock bottom prices, leading to resurgence in their popularity with buyers.”“I fully anticipate that the increased interest in property will not only continue into next year but will increase substantially as the year progresses.”

BoE's King plotted bailout of global banks in March '08

Bank governor Mervyn King plotted a secret bailout of the world banking system using funds from four cash-rich nations, including the UK, in March 2008, according to a US embassy cable released by WikiLeaks.

Six months before the world financial crisis reached its peak, forcing taxpayers to rescue collapsing financial institutions, King told US officials in London that the UK, US, Switzerland and Japan could jointly enable a multibillion-pound cash injection into global banks, the Guardian reports.

The plan would override the "dysfunctional" G7 nations, King said.

According to the cable, King told US ambassador to Britain Robert Tuttle and the treasury deputy secretary Robert Kimitt that there needed to be a "coordinated effort to possibly recapitalise the global banking system".

The plan would also be a way to rid the banks of the toxic loans on their balance sheets.

In the cable dated March 2008, the ambassador says King's proposals "were not casual ideas developed in the course of a luncheon conversation.

"It was clear that his principal objective in the meeting was to outline his outside-the-box thinking for Kimmitt."

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England is a land of ostriches

In 1909, Winston Churchill said -


“If I had my way I would write the word ‘Insure‘ upon the door of every cottage and upon the blotting book of every public man, because I am convinced for sacrifices which are inconceivably small, families and estates can be protected against catastrophes which would otherwise smash them up forever. It is our duty to arrest the ghastly waste, not merely of human happiness, but of national health and strength, which follows when, through the death of a breadwinner, the frail boat in which the family are embarked, founders, and women and children of estates are left to struggle in the dark waters of a friendless world”

So 101 years later, did we listen to him?………

Almost half of Britons are jeopardising their financial futures by neglecting to take out insurance to cover loss of income through illness or death, new data shows.

Twenty four million people are thought to have no cover in place for such an event, according to research.

Those without cover who said they had considered taking out an insurance policy to provide if the main earner of a household was unable to work or died, would be underinsured by an average of £14,500 a year.

A third of people estimated that they could live on less than 35% of their take home pay if they suffered a serious injury or illness.

That equates to just £171 per week for an average earner – £300 less than the current average household expenditure of £471.
…so did we listen to him?….apparently not.

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Sellers warned to beware sole agency clause

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Rates at all-time low as high LTV deals surge

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Housing Minister says MMR would have prevented him getting a mortgage

The Housing Minister, Grant Shapps, says he himself would have failed to get a mortgage had new proposals for the mortgage market drawn up by the City watchdog been in effect when he bought his home.

 

Speaking at the National House-Building Council's annual lunch, Mr Shapps said: "I think it was about the moment I realised that I wouldn't have a mortgage if the Mortgage Market Review (MMR) changes went through that I kind of thought that this might be going a step too far."

NatWest halts interest only for first-time buyers

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