A debate that has been gaining momentum over the last few weeks is whether the UK will enter into a period of negative interest rates or not – the Great Rate Debate.
Negative interest rates?
Comments made by Andrew Bailey, Governor of the Bank of England, in April seemed to rule out the Bank of England going below zero in the Great Rate Debate. However, in late May he made comments that it would be “foolish” to rule out negative interest rates. A sensible position to hold as it would mark a significant change in Bank of England policy if it became a reality. So much so that I feel if we were to seriously go down this path it would be very well sign posted.
So at this stage, I feel it is more a ‘what if’ question, as in – what if the economy deteriorated further, would you rule out rates going negative? Which is how the question has been posed and got the above response. Answering questions on this is one thing, making it policy is really quite another.
Money market rates would tend to agree with my thoughts on this, as there was a clear dip in rates toward the end of May as the negative interest rate debate surfaced, but we have seen an increase to market rates in early June as realisation set in that is more speculation at this stage.
The UK economy and the Great Rate Debate
This is a debate we are keeping a very close eye on as I feel this story will rumble on for some time yet. The true damage to the UK economy is very unclear at present as so much stimulus is in place, especially that of the furlough scheme. As of the 12th May, a staggering 7.5 million people were having their wages paid by the Government. For such a right wing Government to adopt the most socialist policy I have ever seen in my lifetime shows just how strange the times are we are currently living in. As this scheme unwinds we will know a lot more and if it adds weight to this argument, or dissipates it.
If rates do go below zero it will have a fairly nominal impact on mortgage rates, another aspect of the Great Rate debate. So far in 2020, 88% of the mortgages we have arranged have been on a fixed rate basis, therefore any rate change up or down will not affect the monthly payment. Sadly, that is likely to be the case for most variable rate products as well as lenders have inserted a “collar”, meaning even if rates drop, your payments will not.
The majority of variable rate mortgages we have set up for our clients are where they are unsure if they will move or not, or are looking to take advantage of lower fixed rate deals later in the year (sometimes both). So they want to take a penalty free option which is most commonly a Tracker rate.
I think this approach has a lot of merit as money markets have dropped significantly in the last 3 months, however mortgage rates have only nudged down a touch. That suggests to me that later in the year when lenders have their capacity back up, and will clearly be a mile off their lending targets for the year, the only way to get more business in will be to cut rates. So being in a position to take advantage of that may be in your interests.
Will Brexit be next hurdle?
That approach is not for everyone, but if it does interest you, we can talk you through how best to tackle it, in what is going to be a very interesting end to the year. As once we shake Covid, Brexit is the next big hurdle… 2020 is shaping up to be a hugely defining year for so many reasons. At this stage, with so many huge variables ahead, it is extremely difficult to say how this will all play out with any real confidence. That is why we believe flexibility will be key to take advantage of what lies ahead.