While it is often joked that property is a national obsession in the UK, we are actually a long way down the list in terms of home ownership in Europe and much of the rest of the world. Only the Germanic countries of Germany, Austria and Switzerland have lower home ownership rates in Europe, and renting is a more usual arrangement in these countries.
However, that lowly showing doesn’t detract from the amount of time we seem to spend discussing, dissecting, and pondering interest rates – the charge that we pay for owning a mortgage. Succinctly put, an interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited or borrowed – often referred to as the principal sum. And the total interest on an amount borrowed depends on the principal sum, the actual interest rate, the compounding frequency, and the length of time over which it is lent, deposited or borrowed. Therefore, interest rates are big news and are a major driving force behind mortgages and credit card borrowing.
For the last ten years, rates have been historically low, but the Bank of England (BoE) has signalled small rises to come, and that has left the market a little shaken, but perhaps not stirred. With rates at just 0.5% even those with large mortgages are still fairly happy, but with another rise planned, things are looking a bit less rosy. Interest rates rises are one of the major tools that the BoE uses to cool off the economy when inflation get too high, and with it currently tipping the scales at 3.1%, the bank is a bit jittery. And up go interest rates.
So, interest rate rises are something that borrowers can do little about and raises usually have to be absorbed into the monthly budget. But the savvy borrower always has their eye on the market, and since rate changes no longer simply happen overnight as they used to, a bit of forward planning can help insulate you. There are plenty of good fixed-rate deals to be had and if you get on one of those then you could still enjoy low interest rates for three or even five years.
However, just because the rates are available, it isn’t assured that you will be offered one. Lenders have become a lot more careful about who they lend to and as well as searching credit references, they are also applying affordability criteria to new loans, and apply theoretical stress test affordability as if rates were 6% or 7%. If the customer appears to struggle under such circumstances, them the loan may well be denied.
The UK’s property market is buoyant but previous problems have left lenders less than enthusiastic to hand out money as they have done before and risk a potential market collapse. With that said, banks have worked hard to produce an array of arrangements and fixed rate deals that can help you make the most of the current financial climate. If you need help, contact Grange Mortgages to discuss your options.