After almost ten years of keeping US interest rates on hold, last week the US Federal Reserve raised rates.
It was the first interest rate increase since 2006 and means its key Federal Funds rate – the rate at which banks offer to lend to each other overnight - rose to a range of between 0.25% and 0.50%
At only a quarter of a percentage point, it would be easy to see this move as small beer. It isn’t. The significance a US Fed rate hike is huge and will reverberate around the international central bank community. That’s because it shows that the US central bank now believes the recovery in the world’s largest economy is sustainable and that now is the time to begin the road to rate “normalisation”.
For the UK, this move by the Fed is likely to be particularly poignant – although Bank of England (BOE) governor has repeatedly offered reassurance in recent years that when the BOE does begin raising rates, it will only be when they are certain the UK economy can withstand it. And, crucially, any increase in UK interest rates will be small and slow.
Currently, expectations – from economists, analysts and also the BOE (according to its latest projections) – are that the UK’s main interest rate, the base rate, will begin to rise sometime in 2016. Everyone is certain, however, that when rates DO begin to rise, they will do so slowly, in line with BOE governor Mark Carney and his Monetary Policy Committee’s consistent messaging.
So, when UK rates do finally begin to rise – the last time the Bank voted to increase rates was in July 2007 before the global financial meltdown – what will this mean for mortgages?
As in the past, it is likely to mean that mortgage rates begin to rise. But, as they are around 4 full percentage points above the 0.50% UK interest rate already, any increase is likely to be pretty small, and possibly only after the second rate rise which may not even happen until the second half of 2016, or possibly even into 2017.
In the past – by which I mean pre-2008 credit crunch – your average two-year fixed 75% loan-to-value mortgage rate was typically around 0.2 to 0.3 percentage points above base rate, according to official data from the Bank of England. For example, when the BOE raised rates to 5% in November 2006, the average 2-year fixed 75% LTV mortgage rate rose to 5.2% and when the Bank raised rates to 5.75% in July 2007, the same mortgage rate rose to 6.11%.
With the difference between UK interest rates and mortgage interest rates already much wider than that, it will be interesting to see how things progress.
When mortgage rates do begin to follow UK interest rates higher, it is likely to have a dampening effect on the UK’s housing market and also probably act to slowdown the pace at which house prices are rising. But probably not by an awful lot, at least to begin with.
So while it’s important to keep abreast of the BOE’s interest rate views and actions as well as thinking about how a rate rise could affect your mortgage repayments, it’s certainly not time to panic or rush into any property or mortgage decisions.