Interest rates are rising if you want a mortgage

City am today reminds us that mortgage rates are rising. The Bank of England can and does keep short term official rates on hold, but the rates people actually pay are going up. Savers are expecting better returns, so borrowers have to pay more to cover the costs of deposit taking. Meanwhile smaller and medium sized companies have long been paying way over the very low base rate.

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22 Comments

  1. Brian Tomkinson
    Posted March 8, 2012 at 2:52 pm | Permalink

    JR: “Savers are expecting better returns”

    We are in deed, but we aren’t getting them!

    • rose
      Posted March 8, 2012 at 5:17 pm | Permalink

      And our plight is rarely mentioned.

      • rose
        Posted March 8, 2012 at 5:22 pm | Permalink

        I do remember John H once discussing it with someone on Today though. He protested that savers didn’t need any consideration “because if someone has money in the bank they must be rich”. Perhaps someone should compile a book on the wit and wisdom of the BBC’s Today Programme presenters, especially on economic affairs.

  2. Denis Cooper
    Posted March 8, 2012 at 2:57 pm | Permalink

    The banks have got to make enough operational profit to allow the book value of their assets to be gradually written down while building up their capital reserves. Either the customers must help pay for the mistakes made by the banks when they acquired those assets, or at some point the taxpayers may have to step in again to support the banks. Of course it’s a disgraceful shambles and we should never have got into this position, but we are where we are and there aren’t any other realistic alternatives for getting out of it.

    • JimF
      Posted March 9, 2012 at 8:40 am | Permalink

      Perhaps I should try telling my customers that they should pay for my mistakes….
      Don’t think it works like that in the real world (outside banking)
      Equity holders and those responsible inside the banks should have paid for the mistakes.

  3. Leslie Singleton
    Posted March 8, 2012 at 3:23 pm | Permalink

    Always, and by no means just from you, there is a comment on the poor down-trodden SME’ s usually to the effect that they cannot borrow from the nasty banks. Speaking as an ex lending banker why should or would, in particular from the point of view of the individual analysing the loan, the bank make a loan it doesn’t think it is going to get back? Loan targets of any kind and certainly those involving pressure are the antithesis of good commercial lending–in the wrong incentive environment it is the easiset thing in the world to meet targets by just saying Yes to poor credits. Why doesn’t the Government if it wants to help SME’s (in order to raise demand and all that economics claptrap) set up a Small Business Adminustration similar to that in the USA, which has many decades of successful experience I am sure they would share with us?

    • Richard
      Posted March 8, 2012 at 6:06 pm | Permalink

      I agree with you to a point, but I think Banks are so busy lending to local and national Governments by the millions they have lost interest in lending thousands to SME’s.
      Companies I know are being asked for high rates of interest combined with Directors personal warranties, as well as high arrangement fees and high account charges.
      Often it makes the project a non-starter

    • JimF
      Posted March 9, 2012 at 8:35 am | Permalink

      I think the point being argued is that the banks have gone from silly over-generous lending at too low rates to the reverse, all in the name of following the crowd.
      You’re on shaky ground trying to defend the actions of banks towards sme s these past 10 years as being logical.

  4. David John Wilson
    Posted March 8, 2012 at 3:50 pm | Permalink

    The basic interest rates paid by banks should on average as a minimum match inflation. Savers should not lose money by lending it to government owned banks like RBS, Lloyds and NS&I. It is utterly disgraceful that NS&I withdrew ts savings offer because it offered a favourable rate (just below inflation) and was attracting too much money.
    NS&I which is a government vehicle for raising money should be allowed to pay interest at any rate that is lower than the government is paying on its bonds and there should be no cap on the amount it is allowed to raise. This would reduce the cost of government debt and at the same time time force banks to pay competitive rates to savers.

    • outsider
      Posted March 8, 2012 at 5:33 pm | Permalink

      The huge rise in savings that could be achieved by NS&I could be used to lend to SMEs at competitive commercial rates, preferably via risk-bearing commercial lenders rather than the state agency suggested by Leslie Singleton. Job done.

    • Bob
      Posted March 8, 2012 at 6:59 pm | Permalink

      @JohnWilson
      Yes, but then the banks would have to increase interest rates for their depositors, or face losing them. This could cause a liquidity problem which would force them to dispose of assets, which would mean writing off the difference between the balance sheet value and their real value. I imagine this would lead to some extraordinary write-offs of the magnitude that could shake the economy to pieces.

      You have to remember that if one bank goes down it would likely have a domino effect due to interbank counterparty exposure.

      The governments preferred solution is to steal the money from us by stealth, instead of taking the brakes off of the economy and allowing the economy to grow and produce a healthy and sustainable flow of tax revenue.

      They’re marching to Labours tune so it’s more about punishing success and rewarding failure, and we all know where that will lead.

      The Tories have always seen their poll ratings rise when they announce conservative type polices, like IHT abolition, EU referendums and vetoes, but they always seem to get cold feet when the lefty dog whistles are blown.

      With Cameron’s failure to deliver on promises such as the bonfire of the quangos, Tory supporters have probably realised that we have a PM who is either not conservative at all or is just too weak to stand up for conservative values, which will lead to defections from the party and the implosion of the party which Peter Hitchens has been forecasting for some time, which in turn will allow a true conservative party to take it’s place.
      +++

    • lifelogic
      Posted March 8, 2012 at 7:29 pm | Permalink

      The best thing for savers is to cut out the banks. They are often far less solvent than their borrowers. It is thus best to cut the out middle men, they are as much use as a chocolate tea pot – worse you can eat that. You can even use the Enterprise Investment Scheme if you find an honest one or better still do one yourself and get 30% (or next year 50%) tax relief perhaps in the seed EIS and no tax on the gain.

      About the only good thing the coalition have done so far.

      Oh sorry they did abolished the M4 bus lane and nearly got rid of HIPs.

  5. zorro
    Posted March 8, 2012 at 5:42 pm | Permalink

    One of my sounder financial decisions about 5 or so years ago was to get a BoE tracker mortgage. I suspected that there would be a slump and that they would be forced to lower interest rates, but didn’t realise that it would last quite so long! Even though I may have gained some advantage from the ZIRP policy, I do not agree with it….but I’m glad that I did it.

    zorro

  6. Lindsay McDougall
    Posted March 8, 2012 at 6:08 pm | Permalink

    The conclusion must be that the base rate of 0.5%, which has been pegged for 36 straight months, is way out of line with market realities. So raise it. Only the government, plus people and institutions that have high levels of debt, benefit from the 0.5% rate.

    We probably need to get a new Governor of the Bank of England and a new MPC, with instructions to keep strictly to the knitting of an inflation target. In about a year’s time, when hopefully a recovery is in progress, there will be an opportunity to drive down the inflation target to zero.

  7. Pericles
    Posted March 8, 2012 at 6:38 pm | Permalink

    Pray tell me, Mr. Redwood: if you bought a motor-car for, let us say, £20,000 and six months later the dealer pitched up on your doorstep demanding an extra £1,000 and a year after that demanding another £1,000, how would you react?

    ΠΞ

  8. sm
    Posted March 8, 2012 at 8:41 pm | Permalink

    I think government and economic policy has made buying a home a speculative nightmare and or doing the reasonably prudent things !

    Can you get a fixed mortgage for the term of a repayment loan, with income insurance, with portability and afford it?

    1)Given that property prices are high compared with earnings which are flat/falling.
    2)Given interest rates are unlikely to fall.
    3)Given the risks of maintaining a reliable income.
    4)Given the deposits required (what does that suggest).
    5)Given pressure on the rented market.
    6)Given little state help during unemployment.

    I would say its an awful decision for a person to make , if they have managed to retain a deposit.I would consider moving in with family, until a more healthy equilibrium or bottom is reached. Unfortunately your savings maybe worthless by then.

    What is the vision from the coalition. More to the point can we trust the HMG/BOE to maintain confidence in the currency and manage inflation.

  9. Mark
    Posted March 9, 2012 at 12:22 am | Permalink

    They’re going to need to rise quite a bit further to cut the subsidies to mortgages and free banks to lend to businesses on better terms. Banks are still doling out almost £140,000 per mortgage on average though, so it won’t do much do bring down house prices until they cut that.

  10. Mr. Frost
    Posted March 9, 2012 at 3:35 am | Permalink

    We have seen Halifax tell certain mortgage holders that despite their agreement to hold their mortgage interest rates at 2% (or whatever) above the base rate, they are raising it anyway.

    I expect other banks to follow.

    So individuals do not have the financial clout or power to take on the banks so are left with a Hobson’s choice of paying more each month with their current provider or switching mortgages where they are currently very unlikely to get a better rate, again having to pay more.

    I’m very rarely in favour of Govt. intervention and am not advocating a change in the law – but I think the Govt. should send clear signals to banks that such behaviour will not be accepted so that the ombudsman has clear direction on who’s interests to protect.

  11. Richard1
    Posted March 9, 2012 at 8:35 am | Permalink

    Allister Heath is an excellent writer and commentator & seems to have a very good grasp of key issues in economics. Let’s hope we hear more of him in the media.

  12. Leslie Singleton
    Posted March 9, 2012 at 10:30 am | Permalink

    Outsider speaks against the American Small Business Administration. I had experience (I have been a lending banker on both sides of the Atlantic) of SBA Loans over 30 years ago and I have just confirmed they are still going–in any event there is an easy-of-access website–which must mean something. Apart from the undeniable benefit to SME’s (at least certain types thereof) the point is that if the Government wants banks to lend to what they see as lousy credits in a third rate economy (which I see as a laudable ambition) it is up to the Government who got us in to this mess in the first place to provide assistance. I am very much not talking about Cable’s totally daft Business Bank with presumably Civil Servants selcting the loans to make (horrors!). If memory serves, banks in the USA originating SBA loans have to keep a certain proportion which keeps the system pure. I do not know as I write whether the SBA makes a profit (like ECGD here) but it would not surprise me if it does. Even if it does not, a modicum of pump priming would make sense to me. It would help unemployment directly best I can see and I would rather use taxes on this than on a lot of other Government spending. It is not the banks’ job to right the economy. This is not a defence of investment banking or derivatives or hedge funds just plain vanilla commercial lending.

  13. Barbara Stevens
    Posted March 9, 2012 at 4:37 pm | Permalink

    We have no mortage but we have savings, but I still wouldn’t like to see interest rates rise just to give us a greater benefit. I prefer the interest held low to benefit those who still have a mortage. I know what it’s like when interest rates are hiked, we had that in the 80s to 15%, it was hard but we got through it, but I’d much rather those with mortages today didn’t have to face the same burden. Things are just as tight now as way back then, and it’s not nice to suffer like we did. I hope the Bank of England keeps interests low, we are suffering enough with the economic climate as it is. I’m prepared to have less for others to gain, in the short term.

  14. James Sutherland
    Posted March 10, 2012 at 10:50 am | Permalink

    The low “official interest rate” has long been little more than fiction; some, perhaps most, tracker mortgages even have clauses to the effect that it will be ignored if below a floor of 1% or so. With inflation at multiples of their claimed “target” it’s hard to understand the MPC acting to increase it still further, rather than making at least a token gesture to bring it down towards target levels.

    Perhaps I should start an e-petition calling for a statutory requirement that the Governor and his MPC forfeit their positions if inflation remains significantly above the official target for more than a certain period. The current rule, that he write a letter to the Chancellor amounting to “yep, still way off target, still not doing anything to improve it, yours complacently, etc” is clearly insufficient!

  • 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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