by Mark Johnston
Yesterday we look at how the events of 2007 have impacted the UK economy and mortgage market in 2011. One of the biggest concerns for borrowers is the real threat of a interest rate increase which may push already struggling families into the red.
Back in 2009 interest rates dropped to 0.5%, the lowest they have ever been. This measure was taken as a reaction to the credit crunch and financial crisis and together with other support prevented a housing market collapse and millions from loosing their homes.
Many experts are still predicting that the Bank of England will hold interest rates at 0.5% otherwise it is feared that any quick increase could destabilise an already delicate recovery. Most analysts are being more cautious and are expecting a small rise to 1% in the second part of 2011.
The pressure to increase interest rates comes from soaring inflation rates. These are as a direct result of global increases in the cost of commodities. In particular oil and energy have driven inflation up to 3.7% and it shows no sign of staying there.
The coalitions spending cuts and introduction of the 20% VAT charge may also have a far reaching impact on the British economy. Fallowing a 12 month reduction of VAT to 15%, the tax was increased in January 2010 to 17.5% and again in January 2011 to 20%.
This rise in VAT together with other planned tax rises should have a positive effect on inflation over time. Depending on whether the 20% rate remains, experts are expecting inflation to fall sharply in January 2012 as a result of the change.
The impact of tax changes on inflation is measured using the CPIY index which is a measure of CPI inflation with any effects on tax changes stripped out. CPI on itself has risen to 3.7% which is what is making many commentators twitchy but CPIY has stayed around the 1.5% for some time now with only a marginal increase to 2% been seen in recent times. The CPIY index will be closely examined when the Bank of England’s Monetary Policy Committee get together to discuss whether a interest rate increase is needed.
Some insiders are blaming the sudden increase in inflation on the cost of swap rates increasing. Swap rates are in effect the cost of wholesale lending to banks and building societies. If swap rates increase, so does the cost of lender and as a result the cost of a mortgage is increased. Such increases have already been seen recently with the Yorkshire Building Society, Halifax, Barclays and First Direct all increasing their fixed rate prices or removing their lowest offers from sale.
Those looking to secure a good fixed rate mortgage should act soon, many providers are already experiencing high demand and can choose to pull products from sale at a moments notice. Tomorrow mortgagerates.org.uk will continue the 2011 review with a look at re-mortgaging and the future of interest only loans.
Related stories to : 2011 Review – Interest Rates & The Cost of a Mortgage