The point at which the Bank of England Base Rate increases is getting closer, Governor Mark Carney told the Annual Trades Union Congress yesterday.
Carney said: “With many of the conditions for the economy to normalise now met, the point at which interest rates also begin to normalise is getting closer.”
“In recent months the judgement about precisely when to raise Bank Rate has become more balanced. We have no pre-set course, however; the timing will depend on the data. Moreover, the precise timing of the first rate rise is less important than our expectation that, when rates do begin to rise, those increases are likely to be gradual and limited.”
“Rates will go up only as far and as fast as is consistent with price stability as part of a durable expansion, with the maximum sustainable level of employment.”
Rates are, however, unlikely to rise to levels seen pre-credit crunch, says Carney, adding “For a variety of reasons ranging from the weakness in the euro area, to ongoing repair of household balance sheets, we are not expecting interest rates to head back to the levels seen prior to 2008.”
“Our latest forecasts show that, if interest rates were to follow the path expected by markets – that is, beginning to increase by the spring and thereafter rising very gradually – inflation would settle at around 2 per cent by the end of the forecast and a further 1.2m jobs would have been created. In other words, we would achieve our mandate.”
Whilst this is positive news for the UK economy, there comes a stark warning for homeowners and those looking to move home, says Taj Kang, director of specialist broker Contractor Mortgages Made Easy.
“We knew that interest rates would soon rise when the economy started to stabilise, so I welcome the news that this appears to be the case.”
“The worry, however, is that an increase in Base Rate could cause financial problems for many homeowners, and lead to struggles to maintain repayments.” A theory backed up by recent research on behalf of mortgage giant Halifax.
A less obvious worry however, says Taj, is very easily corrected by those looking to upsize soon.
“Recent research by Sainsbury’s Bank revealed that a staggering 64% - nearly two thirds - of people who have moved to bigger property in the last five years failed to review their protection needs.”
“I find this worrying, frankly, that in a financial environment in which mortgage repayments are a higher proportion of incomes than ever before, people are failing to put in place safeguards in the event of financial instability. Dare I suggest, it’s more than a little irresponsible by those with families to look after.”
“This needs action now, before it is too late. If you have not reviewed your protection strategy recently, speak with a broker who understands your circumstances and how you work, how you’re paid and everything that goes with it. If you had a machine in the corner producing money, you’d insure that if you could, so why not your earning potential? It’s a bit like buying home insurance when your house is on fire – you may not realise until it’s too late but not putting a safety net in place could be catastrophic.”
Article By: Mark McBurney, Senior Mortgage Consultant at Contractor Mortgages Made Easy
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