UK inflation is only heading in one direction; let’s hope interest rates don’t follow suit, writes Simon Mules, commercial director at Optimum Credit. The majority of economists suggest it’s a matter of how high inflation will rise, rather than ‘will it?’
The Bank of England sets interest rates to hit the government’s 2% inflation target. Inflation has already seen that target surpassed (2.9%). Arguably, interest rates should rise – did anyone believe they would stay so low for so long? In reality, it’s a bit more challenging than that.
The members of the BoE’s monetary committee have to decide whether the upward movement is a blip or trend. In addition, another consideration would be if inflation became entrenched and wages start to rise, as employees negotiated higher salaries to combat rising prices. Interestingly, the BoE monetary committee vote of 5 to 3 in June was the closest call for a rate rise since 2007. At the time of writing this article, Mark Carney, the governor of the Bank of England, has said from his perspective “now is not the time”.
It’s clear we remain in uncertain times, as the governor said: “In the coming months, I would like to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm, and more generally, how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations.” What does this mean to a mortgage adviser? Let’s start by saying the process for an adviser selling a first charge mortgage is almost identical to that of a second charge mortgage.
The below process is what an adviser is likely to go through when establishing their customer’s needs
- Whether the customer’s requirements appear to be within the mortgage lender’s known eligibility criteria for the regulated mortgage contract;
- Whether it is appropriate for the customer to have an interest-only mortgage, a repayment mortgage, or a combination of the two;
- Whether it is appropriate for the customer to take out a regulated mortgage contract for a particular term;
- Whether it is appropriate for the customer to have stability in the amount of required payments, especially having regard to the impact on the customer of significant interest rate changes in the future;
- Whether it is appropriate for the customer to have their payments minimised at the outset;
- Whether it is appropriate for the customer to make early repayments;
- Whether it is appropriate for the customer to have any other features of a regulated mortgage contract;
- Whether the regulated mortgage contract is appropriate, based on the information provided by the customer as to his credit history
- Whether it is appropriate for the customer to pay any fees or charges in relation to the regulated mortgage contract up front, rather than adding them to the sum advanced.
The list above is not exhaustive and it is therefore important that if you are discussing debt consolidation with a potential applicant you also consider:
- The costs associated with increasing the period over which a debt is to be repaid;
- Whether it is appropriate for the customer to secure a previously unsecured loan;
- Where the customer is known to have payment difficulties, whether it would be appropriate for the customer to negotiate an arrangement with their creditors rather than to take out a regulated mortgage contract. Question four above is as relevant now as it’s ever been.
An adviser cannot guess what will happen to interest rates, indeed many applicants in recent years prefer the certainty of fixed rates in uncertain times. At Optimum, we will normally see 40%-50% of customers completing on a fixed rate product. As we move closer to an interest rate rise, I wonder if this number will increase.
The one thing I would say with certainty is that with the rates in the second charge market being as attractive as they have been, brokers should be reviewing the needs of their customers and helping them put their finances in order before we return to the days of rising interest rates.
If you have a customer you want to help and are uncertain as to whether a second mortgage is the right solution then don’t delay, ask the Y3S Group or Optimum Credit if they can help and take advantage of not only excellent rates but a speedy service. It’s never too soon to start looking for the best deal!