I do worry about Mark Carney, Governor of the Bank of England – he keeps upsetting the mortgage market.
Now don’t get me wrong – I don’t doubt his technical competence and in many ways he is a breath of fresh air compared his predecessors. He has a refreshing tendency to correct some of the mad antics of the Chancellor of the Exchequor, particularly criticising the house price bubble effect of Funding for Lending and Help to Buy programmes on housing.
Osborne may yet regret his appointment or maybe it was a deliberate policy to divert the flak (“Not my fault Mr/Ms Voter – it’s all the BoE!”)
The Funding for Lending programme was meant to pump money into businesses but of course given the chance, banks far prefer secured lending on property than helping businesses that may go bust. So even before the Help to Buy mortgage support started, criticised here from the outset, the property bubble was well on its way.
The effect of Carney’s statement last November of withdrawing Funding for Lending for mortgages was immediate – the bottom almost dropped out the market for a number of building companies. These have recovered, supported by the other feel-good schemes but for a time there were a lot of irate investors around!
Carney’s recent Mansion House speech had another result. He suggested that interest rates may well rise towards the end of this year rather than next year. Sterling immediately strengthened as markets only saw the headline, ignoring the many caveats particularly including comments on the spare capacity in the economy – the ability to do more work without prompting increased wage demands. A comprehensive review of what he actually said may be found on the Forbes blog.
So while sterling may well stabilise at 1.70 to 1.72 dollars, about a 2% rise, this will be reversed if indeed interest rates do not increase before early next year.
The rate-rise prospect has concentrated the minds both of mortgage lenders and mortgage holders. Suddenly deals that assumed interest rates weren’t going up until next year are being withdrawn. And householders have started to worry what would happen with, for example, a rise of 25 basis points – 0.25%?
If banks reflect the rise with a similar rise in mortgage interest, do not fear! Most mortgages are at around 3% these days so while the Bank Rate will have increased from the record low of 0.5% to 0.75% – a 50% increase – this does not mean a similar rise in mortgage payments!
Going from 3% to 3.25% on a £100,000, 25 year repayment mortgage would mean an increase of just £14 a month from £474 to £478 and pro-rata. For a similar interest-only mortgage, payments would increase from £250 a month to £271, a £21 increase, again pro-rata. These are not massive increases and Carney has suggested that any subsequent rise in base rate will be slow. And as the market hasn’t read the small print, it may well not happen anyway.
But one sector of the economy is particularly nervous.
Almost all mortgages are designed for the 40 year job plan – you grow up, find a job, stay in it for 40 years, retire on a final-salary pension then pop off.
This no longer works. Nowadays people change jobs, have portfolio incomes and an increasing number work as contractors or consultants. How do such self-employed get a mortgage, particularly as the Mortgage Market Review starts to bite?
It isn’t easy – people generally have to bare their souls and beg, trying to convince sceptical lenders that their accounts, designed to minimise their tax bill, are actually much better than they look. Contractors may well be much better prospects than someone who ends up working for a company that downsizes or goes bust, throwing its workforce on the scrap-heap. Few lenders have realised this yet.
So it is interesting to find an online resource that is actually aimed at contractors. While it is largely designed for the IT sector, the figures are valid for any contracting profession.
For example, if your rate is £50/hour, this calculator from www.contractorfinancials.com/contractor-mortgages/mortgage-calculator/ suggests that you would be eligible for a mortgage in the region of £360,000. This is effectively a 4 times income mortgage assuming you have 1800 chargeable hours per year.
I wish I had had this when I set out as self-employed all those years ago. I certainly wouldn’t have started paying a lot into a pension fund which not only hardly grew but I have only just managed to get it out.