Rising interest rates – Ouch! Mind the mortgage.

Yesterday in the Commons during the debate on the deficit reduction I warned the government again about rising interest rates. I tried to explain to them that if they persist with huge borrowings and so much overspending, it will drive interest rates higher, damaging the recovery in the private sector. I explained that the markets could do this on their own, whether the Bank of England left interest rates on hold or not.

This morning I awoke to read that Skipton Building Society, one of Labour’s own preferred mutuals and a specialist institution taking deposits and lending for house purchase, has hiked its interest rates. It feels it cannot compete for deposits from savers unless it does so.

The Minister of course was unable to refute, comment on or accept my remarks. It is such a pity they neither listen nor understand what is happening to the economy, preferring their ludicrous soundbites to the realities of the markets that are now beginning to bite them.

Skipton have hiked their standard rate from 3.5% to 4.95% – a big rise of 1.45% or over 40%. It’s 5.2% if you do not pay by direct debit. That’s a mighty long way from the 0.5% the government boasts about in the Commons.

I must say I enjoyed reading the Skipton’s account of what it is doing. Their site begins with an all too true remark “At Skipton BS we know every penny matters”. No doubt that’s why they need more of them.

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20 Comments

  1. BillyB
    Posted January 21, 2010 at 4:28 pm | Permalink

    yes – the current strategy seems to have shafted savers… hammering their returns to finance bailouts and encourage spending. About time the balance was shifted

  2. botogol
    Posted January 21, 2010 at 5:17 pm | Permalink

    lucky the people who still have a mortgagerate tied to base rate.

    • Mark
      Posted January 21, 2010 at 9:16 pm | Permalink

      Really? It depends when they did the deal and if it has a limited life for its differential fix. For example, JR has highlighted Skipton, who currently offer a tracker at Base Rate +4.45% which together with fees they value at 5.5% APR – the same APR as for their 2 year fixed rate offer at the same max 85% LTV. Of course, if you signed up in early 2007 you might have a deal at a discount to Base Rate, but it probably has a limited life at that rate. You could then be in for a very rude shock choosing between SVR and a new mortgage.

      Current Base Rate related deals don't have a limited life, simply because most consider the chances of a below zero Base Rate for any extended period of time (or indeed at all) are insignificant. I haven't been able to find a time in British history when mortgage rates have shown such a high premium over Base Rate or its equivalent. If we were to return to a more normal financial market and Base Rate – say 5% – I'd expect these deals to be re-financed on much cheaper terms.

      • alan jutson
        Posted January 22, 2010 at 11:06 am | Permalink

        Mark

        You are correct.

        I think the average mortgage rate over the past 50 years is something like 8%.
        Anyone factoring in less than this for the future, may get a bit of a shock in years to come.

  3. oldrightie
    Posted January 21, 2010 at 5:21 pm | Permalink

    This is only a small sign of what's to come. It is also something Labour and Brown have tried to subdue by printing money until post election. Now the link between BoE and mortgage rates is broken, as a political weapon it may never return. Thus rates will be market led and we know how bankers operate that system. Before the next election, after this year's, Labour will crow about 10-11% motrgages under a Tory regime. Just a small part of their vindictive "Party before Country, dogma before disaster" politics. Disgusting and shameful.
    As for Skipton's "exceptional circumstances" they are showing the ease with which promises and pledges are broken in the modern world. To whose advantage is this moral poverty best served?

    • Lola
      Posted January 22, 2010 at 11:22 am | Permalink

      Skipton have exercised their 'exceptional circumstances' clause in their mortgage contracts.

      Just what are 'exceptional circumstances'?

      "High Ho! High Ho! Off to court we go"

      The lawyers will be rubbing their hands.

  4. Brian Tomkinson
    Posted January 21, 2010 at 6:04 pm | Permalink

    An example of government meddling, aided and abetted by the BoE and FSA, beginning to unravel. The building societies are struggling to attract money from retail savers due in part to competition from state subsidised banks and regulations imposed on them. Savers were punished for being prudent to allow the government to boast about low interest mortgages. If the pendulum is swinging the other way it is not before time. It does mean, however, that all those marvellous growth forecasts will be up in the air again. Let's face it; this government has concocted an economic mess of gigantic proportions from which it will take many, many years to recover. It's no wonder that there seems little enthusiasm amongst the Conservatives to spell it out to the British people and tackle the job.

    • The Voice of Truth
      Posted January 22, 2010 at 12:12 pm | Permalink

      Wrong – that is exactly what they should be doing !

      • Brian Tomkinson
        Posted January 22, 2010 at 4:16 pm | Permalink

        The Voice of Truth

        I presume you mean that the Conservatives should deliberately hide their plans from the electorate in a cynical attempt to get elected. The riots and disruption that would follow when the consequences of the public spending cuts, which would have been thereby disguised, become reality will make the poll tax riots and the winter of discontent seem insignificant. Labour would act as an irresponsible Opposition and the Conservatives would be lucky to survive as a credible political party.

        • The Voice of Truth
          Posted January 22, 2010 at 5:14 pm | Permalink

          No the reverse in fact, I mean that they should be brutally honest and warn the electorate unequivocally of the necessary medicine that they need to face – i.e. substantial cuts in government expenditure to the tune of 100bn plus or else we will at best stagnate for the next 5-10 years. Cuts should make up 90% at least of teh necessary medicine.

  5. alan jutson
    Posted January 21, 2010 at 6:37 pm | Permalink

    John

    GMAC Head Office in Bracknell came to a similar conclusion 12 months ago.

    From what I understand they could not borrow money on the Open Market at anywhere near a sensible rate, and lend it out at competitive rates to the General Public and make money.

    The decision was made (after a sensible waiting period to see if matters/market conditions would improve) to contract the business, which involved making hundreds of staff redundant.

    To date nothing seems to have improved, and I understand that they have not been in the market of lending, now for more than 12 months, and are running on minimum staff levels.

    Skipton look like they had a clause which allowed them to claim the difference from their customers.

    Reality is striking home.

  6. Stronghold Barricade
    Posted January 21, 2010 at 6:55 pm | Permalink

    I'm sure that they require to attract the savings to ensure that they now fall into line with the government saying that all the financial institutions need a much larger financial base

    The markets will decide, but they need to hurry up and act if they think there is any reason that the deficit might not be sorted out

  7. English Pensioner
    Posted January 21, 2010 at 10:30 pm | Permalink

    I'd just written a piece in my own blog on more or less the same subject, "What is the point of the Bank Rate?", when I read your expert view and am glad that, as an engineer, my economic understanding is somewhat similar.
    I posed the above question as the Base Rate seems to be a totally meaningless number; who is going to invest money at that sort of interest rate? Certainly I'd rather spend mine before it loses all its value due to inflation, and clearly want an interest rate which, after tax, will maintain the value of my money.
    Now that the Skipton BS have broken ranks, I wonder how soon it will be before other lenders do the same? http://english-pensioner.blogspot.com/2010/01/why

  8. Never Mind The Mollu
    Posted January 21, 2010 at 11:07 pm | Permalink

    Hi John
    Im one of those lucky people with a mortgage with the Skipton. My loan will increase by nearly 150 per month. I really dont know with whom I should be more angry- the spectacularly useless Brown administration or the Building Society who are proving that in Yorkshire they really can get blood out of stones!
    Anger has turned to despair though and I see my life as a hard working middle class person with a small business really going down the pan (I haven't had a holiday in 15 years, put my child through uni and I cant afford to be ill and bu–er all pension to look forward to -bit of a contrast to the public sector). This government has shafted us but we hear nothing from the Conservatives that offer any kind of hope of a solution. Your blogs speak of deep understanding of the economic problems faced by the country and suggest solutions that make sense but why do we hear nothing of this from Dave and George? I know they are wary of feeding the vicious Labour spin machine but surely they cant just rely on bad performance from the govt to pave the way to success at the election?

  9. Ex Liverpool rioter
    Posted January 21, 2010 at 11:43 pm | Permalink

    The "Cost" of money will rocket, simple surply/demand….However the scale is what the killer will be. After getting killed in "Teddy's" old seat Obama has at last woken up & smelt the coffee!

    Yes all fine fun dusting off Volker, but NO WAY he can do what he did 1981….17% !!!! ……..5% is the "New" 17%……think about it……am 46 years old, i remember high rates, i know the average rate in Blighty is 7.5% ish.

    But most people have grown up with & got used to very low rates…..their personal "Bussiness model" is about to get blown out of the water…….!

    A contact rang me today & said he just read BOE report & M4 was a shocker…………I have limted knowege on subject but he does.

    WHAT A PITY IT DIDN'T HAPPEN on GORDON'S WATCH !!!
    Mike

  10. Johnny Williams
    Posted January 22, 2010 at 1:21 am | Permalink

    Should interest rates on the global market for sterling rise to 5% or more, then the payments on our debt of £178 Billion Deficit start to look very large indeed. Should we have to pay a 10% Gilt rate in a few years time, the deficit intertst payments alone will be higher than our total Education or Defence Budget.

    Serious economic trouble is ahead and the real pain to voters pockets has yet to be felt.

  11. Kevin Peat
    Posted January 22, 2010 at 1:47 am | Permalink

    Fixed my mortgage in anticipation a while back.

  12. DBC Reed
    Posted January 22, 2010 at 3:07 pm | Permalink

    Sooner or later Brown is going to play the clincher: I have kept house prices up while everywhere else they've slumped .Not that this gives me any pleasure being opposed to election success simply through this economic indicator.The Tories would be dished or hoist by their own petard whatever the cliche is.They could get their retaliation in first by saying that house price inflation is a bad thing and that house prices should fall a bit.But they're not going to break with the habits of a lifetime and too long reliance on the homeowner vote has induced paralysing complacency.

  13. Lindsay McDougall
    Posted January 23, 2010 at 2:42 am | Permalink

    So what are the remaining reasons for keeping base rates at 0.5%?

    One is to reinflate the stock market and the housing market to help out the failed banks.

    The other is to 'end the recession'. However, when no less a person than Dianne Abbot MP opines that we may be in for a W shaped (double dip) recession, we may have our doubts.

    I don't think that these are good enough reasons. Does anybody?

  14. Adrian Peirson
    Posted January 25, 2010 at 12:31 am | Permalink

    They should have let the banks fail, wiped out all peoples loans, mortgages and credit cards associated with those debts.
    The only real money in this country is the Labour of the people.
    That is what backs Gilts, a future promise to the international Banker of your Labour.
    The banks conjured their money out of thin air.
    In order to pay back your mortgage you must work 40 hrs per week.
    The £20 they lend you is not the same as the £20 you must pay back.

    Regardless of how long you have had your mortgage, who has but more real wealth into your home, the bank who lent you unbacked worthless bits of paper, or you.
    It's all a Con.
    We need to hit the reset button by cancelling all debts, including mortgages and go back to sound asset based honest money.

One Trackback

  • By Public Sector Tenders on February 11, 2010 at 1:28 am

    Public Sector Tenders…

    I wish I was able to do the same…

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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