Ups and downs in the mortgage market

bank-of-englandI 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 Suddenly deals that assumed interest rates weren’t going up until next year are being withdrawn.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 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.

4 thoughts on “Ups and downs in the mortgage market”

  1. Interest rates are a very blunt weapon though. Much of the bubble in the UK is in London which is not only where a lot of the jobs are but is also blessed with an injection of money from overseas as it is seen as a safe haven. Prices elsewhere have only about recovered.

    Property taxes in the UK are very low for expensive properties so with substantial capital appreciation expected, London makes for a very good investment if you have a large number of dollars, euros, roubles etc to hand. This doesn’t help young people though.

    The other issue in the UK that I didn’t allude to in the article is that bank lending, apart from mortgages, is very low. Whether this is lack of demand or that some banks still have toxic assets on their books doesn’t really matter – it is generally a bad sign in an economy that is supposed to be recovering.

    So while the market has responded by strengthening sterling I think when it thinks about it, this may well revert. At the moment it is has been at $1.700-$1.705 for the last 5 days, during which time the Fed has also been busy blaming a lower growth on your appalling winter!

  2. When Mark Carney used to be our central banker I remembered him as being quite dovish. Now that he’s working across the pond I do not follow his policy decisions anymore. But I have a feeling he will keep rates in the U.K. unchanged until 2015. Inflation is quite tame and so far there doesn’t seem to be a strong catalyst for rapid growth. Canada is facing the same problem. Central banks around the world are trying to strike the right balance between keeping the economy competitive with low interest rates, and keeping inflation in check. I think it’s interesting that mortgages in both our countries are around 3% but Canada’s overnight bank rate is 50 basis points higher than yours 😀 So maybe lenders in the U.K. have a more profitable spread for their mortgage business than in Canada. What’s the prime rate over there? Ours is 3.00% right now :)

    1. Your overnight is 1% and various interbank rates seem around that figure from the website. I think you are referring to the rate which banks will receive for depositing money in the central bank, which is still 0.5% here. Only the US, Australia and Canada have rates at 3%ish according to the Wall St Journal.

      Typical UK mortgages – probably as low as you can get for business too – are still a little under 3% on offers with trackers currently at 2.5%. Standard rates are more like 4.5% but no-one pays them anyway as we hop around looking for deals all the time.

      Carney’s comments last week sent sterling upwards from $1.68ish towards $1.705 with the prospect of further rises if indeed the deposit rate increases from its historic low. But this morning the BoE was talking to the House of Commons Treasury Select Committee where some amelioration was suggested. As a result the rate has dropped to a shade under $1.70, touching $1.697 at one point.

      I think a rate rise this year is increasingly unlikely – the BoE estimates about 1.5% spare capacity and as I said in my comment to KrantCents, bank lending is too low. The economy has not recovered anything like as much as our government would like us to believe but then there will be an election next year!

      The big problem as always is the London housing market….

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