As UK base rates remain at 0.5% for the sixth year it is sometimes difficult to remember the traditional base rate cycle of years gone by. Over the last one hundred years UK base rates have peaked at around 17% and been as low as 0.5% which is where we find ourselves today. Many will argue that governments around the world have learned their lessons from the US mortgage crash, which saw sub-prime lenders fighting for business at high risk levels, but are we sitting on a ticking mortgage timebomb?
UK government cracks down on unaffordable mortgages
The last few years have been surprisingly lucrative for the UK property market although thankfully the authorities have stepped in to introduce an array of mortgage restrictions which should help to reduce the number of “high risk” mortgages in the future. Whether these restrictions will be loosened in the years to come remains to be seen but at this moment in time, even though some believe they are overcautious, these new restrictions are helping avoid overheating.
Average household incomes
Only last week we saw the coalition government in the UK deliver its final budget before the general election. The coalition believes that average household incomes across the UK will be £900 greater by the end of 2015 compared to the day they stepped into office. Opposition leaders have been quoting a reduction of £1200 therefore we can only assume the real figure is somewhere in between. Either way, there has been little in the way of progress with regards to average household incomes across the UK even though there is evidence that wage inflation is starting to creep back into the market.
Are we too used to low base rates?
As we touched on above, it is sometimes difficult to look back and appreciate the traditional mortgage/base rate cycle with historic average rates around about the 5% level. Can you imagine the massive increase in mortgage payments if base rates were to revisit the 5% level in the short to medium term?
Even though the 0.5% base rate bears no resemblance to mortgage rates across the UK we will undoubtedly see a significant increase in mortgage rates as and when base rates return to the “traditional cycle”. So, whether you have acquired a mortgage recently, or you have a long-running mortgage which may still have some time to run, are you ready for a significant increase in your mortgage payments?
Should the government do more to warn people?
If there is one market in the investment arena which tends to ignore government advice more than any it has to be the real estate market. The government of today and governments of years gone by have attempted on numerous occasions to influence and control the markets only to see their good intentions ignored when it suits investors. However, there is a growing belief that the government should at least look to warn people about the potential increase in their mortgage payments as and when base rates eventually recover to the traditional norm.
Is there a base rate rise on the horizon?
Surprisingly, despite the fact that the UK economy is one of the strongest in the world, the UK property market has been incredibly resilient and investors still favour the UK as opposed to the European market, it is unlikely UK base rate will rise in the short term. Indeed, some of the more cautious members of the Bank of England MPC have been suggesting base rates could fall in the short term if the economic recovery started to creak.
Therefore, it looks highly unlikely that base rates will increase in the short term but they will eventually and many people could be in for a shock with renewed pressure on their household income!