Buyers should not rely on ultra low interest rates

In June, The Daily Telegraph asked Zoopla to find out: “How much would mortgage interest rates have to rise before it would be cheaper for the average homeowner, to rent a comparable property than to pay their mortgage?” Zoopla suggest that the average mortgage rate would have to rise by just 0.69%, an £80 increase, bringing the total cost to £668 a month, beyond this, renting is cheaper than buying a comparable property.

Most people realise that future house price, especially over the medium term, are not an upward one-way bet. But many people regard paying rent as dead money and the British have strong desire to own their own home.

For sale board 2Already there are signs that the Funding for Lending and Help to Buy schemes are inflating the property market. Demand is outstripping supply as would be buyers are concerned that they may lose out if they wait. But buyers will be paying prices that have not corrected since the last credit-fuelled boom because BoE policy has kept interest rates artificially low for four years.

So despite Mark Carney’s ‘forward guidance’ assurances that interest rates will remain at the current low 0.5% base rate for the next three years, this cannot, and was not, guaranteed. Earlier this year the Bank of England had forecast that millions of households would be plunged into crisis by even a small rise in interest rates. According to the BoE, even if rates increased by only 1% to 1.5%, 9% of mortgage borrowers would feel the pinch. If interest rates rose by 2%, one in five households would have to cut spending or work more hours, as repayments on the average £160,000 home loan would rise by £2,200 a year (£183 a month).

With 2-year fixed rates as low as 1.5%, savers have little choice but to hand over their money virtually interest-free, to subsidise borrowers buying homes they cannot really afford at inflated prices you would think the government could see what is coming. Higher interest rates, falling prices, mortgage arrears, widespread negative equity and homes being repossessed and recession. But this will probably be after the 2015 election so that’s all right then!


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