UNDERSTANDING THE BANK OF ENGLAND BASE RATE HIKE

17.09.18

The team from Standard Chartered Bank delve into mortgage holder considerations, given the recent Bank of England base rate hike

With dramatic stories of panicked mortgage holders queuing out of the door to get their variable rate mortgages fixed, the Bank of England’s 0.25% base rate hike appears to have many home owners spooked.

Adopting a little perspective however, and the road ahead appears much smoother than initial impressions might suggest.

Relative to post recession conditions, the 1.5 times increase (from 0.5% to 0.75%) may seem drastic, but by casting one’s eye over a more meaningful timeline, perhaps in the context of the 17% of the early 80s, or the 5-6% pre-recession benchmark, or even comparing it to the base rate in other developed nations, then the most recent hike pales into insignificance.

So why is the UK witnessing such a panic? There really shouldn’t be any, especially when considering that the additional 0.25% only equates to an extra £12 a month for a £100,000 repayment mortgage (based on a 25 year mortgage).

That said, entertaining ‘Murphy’s Law’ through modelling a worse-case scenario can sometimes be useful. The Bank of England has used such a lens to stress test the UK banking system based on the potential shock of a no-deal Brexit. In such a scenario, interest rates were modelled to rise to 4%, a figure that should not be overly worrisome for UK mortgage holders.

With regards to reducing risk through a move from a variable to a fixed rate, it’s important for mortgage holders to appreciate the cost of the transaction. Either way, the recommendation from Standard Chartered Bank would be to seek guidance from a trusted advisor before rushing into any decision, as an expert mortgage solution will be one that’s tailored to work for you and may actually provide you with market advantage.

For more from Standard Chartered Bank visit https://www.sc.com

*rates all true at the time of writing

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