With the uncertainty surrounding Brexit, how are interest rates going to be affected in the short to medium term.
The growing uncertainty surrounding Brexit does nothing to help steady consumers nerves. However, for homebuyers in particular it could very well be a real advantage.
Whilst the Prime Minister is attempting to push his deal through, other MPs are seeking an extension and even a second referendum. Regardless of where you sit in this debate, the delay and uncertainty is unwelcome by all parties.
Who Determines Interest Rates
The Base Rate is set by the Bank of England, and is used as a tool to balance the levels of growth or recession the country faces. Most mortgage lenders will base their interest rates on this base rate, and where it rises and falls so too will their rates change. The Bank of England react to market changes, current events and estimated forecasts of economic productivity. The aim is to keep inflation (the rate at which goods and services increase in cost) to a 2% target.
Put simply, in periods of slow economic growth the base rate is lowered to make borrowing more affordable and to encourage people to spend money, thus boosting the economy. In periods of high inflation, the Bank of England may increase interest rates to help curb spending and bring inflation down.
There are a number of factors that all come into play when the Bank of England calculates its base rate, but they are a little too complex to go into here.
When rates drop this tends to be good for borrowers as it becomes cheaper to borrow money, however it impacts savers as they won’t be able to get rates as high. The opposite is true if rates rise, it becomes more expensive to borrow money, but better for savers who will see their interest rates increase. (this assumes of course that these products in some way track the base rate, if you have a fixed product this will remain the same until the fixed rate period ends).
What does history tell us?
History has shown in times of an economic slump, the base rate tends to get lowered. For instance, in June 2016 when ‘Leave’ came out on top in the referendum by a 4% margin, the value of the pound dropped to a 31-year low. In reaction to this the Bank of England dropped the base rate to 0.25%, the lowest rate in decades.
Most economists are predicting an economic slump if the UK leaves the EU with no deal.
It would therefore make sense to assume that the Bank of England will reduce interest rates. This can only ever be an assumption as the Bank of England can choose any path it likes. There is no guarantee that rates will drop, even if the majority of economists predict it will. Mark Carney, the governor of the Bank of England stated to the Commons Treasury Committee that a no-deal Brexit would likely lead to the Bank of England to cut rates. There is even talk from Gertjan Vlieghe of the Monetary Policy Committee that rates could be cut to zero. This is all speculation, and should the value of the pound drop further this could increase inflation as overseas goods get more expensive, which could cause the opposite to happen and interest rates to rise.
What we have noticed recently is a general trend in mortgage rates going down, leading us to believe that lenders see a period of low bank of england base rates moving forward. If you are on a standard rate mortgage or a tracker type product you may have seen your payments reduce recently.
What is the best course of action?
If you want certainty moving forward, you could always look to a fixed rate mortgage for a set number of years. This will give you the security that your monthly payment will not rise, however if the base rate continues to drop you won’t benefit from a decrease. You could wait to see how the market reacts over the next few months. If the interest rates drop you benefit as a borrower, but if the base rate increases mortgage rates will increase and borrowing will become more expensive.
Whatever happens, it’s sure to be an interesting time in history.
If you are unsure of which way to turn, we recommend speaking to one of mortgage advisers who can help you find the right path for your circumstances.
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