Prediction is very difficult,” quipped Nobel-winning physicist Niels Bohr, “especially if it’s about the future.” Unfortunately prediction is now a deeply practical matter for the nearly 1 million Londoners with a mortgage, many of whom currently benefit from cheap fixed-rate deals, but precious few of whom possess either a doctoral degree in quantum theory or one in macroeconomic forecasting.
A prolonged period of low interest rates – an anomaly by historic standards – has meant nearly 15 years of cheap debt. That’s allowed buyers to raise ever-larger mortgages, which in turn has driven up house prices – nowhere more so than in London.
The market fully expects this to continue, with base rates quite possibly set to double again–or worse–over the next 12 months.
Central bankers don’t want to scare the horses. Rate hikes could yet trigger a house price crash which would cause all sorts of consumer misery, further deepening the long recession now thought likely. But they must be seen to do something to temper runaway inflation.
So much for the gloomy macroeconomics, let’s make this real. Consider Lydia, who commutes into London most days from the pleasant exurban town of Faversham in Kent, and who has an outstanding mortgage of £400k.
With 15 months left to run on her current 2 per cent fixed rate deal Lydia has been paying about £1,700 a month. If base rates do indeed double from their current levels, that would mean an increase in her monthly payments of £350 or so when she comes to refinance.
Lydia and her husband can’t really afford that. And interest rates could rise faster still, which would be apocalyptic for her family finances. The thought has her losing sleep.
Perhaps Lydia only has herself to blame. She took on a big mortgage when ultra-low rates meant that things could only ever go in one direction. But it’s not like the professionals saw this coming either.
Or she could refinance early. She can get a new deal today at a little under 3 per cent, and take the hit of £150 per month or so on her repayments. That’s painful, but is just about affordable for her with a little belt-tightening.
But this option means breaking her fixed deal, which comes at a real cost today of 3 per cent of the outstanding balance – a tidy £12,000.
So, does Lydia stick with her current deal, facing an uncertain future increase, or does she twist, taking a big hit upfront to lock in a deal now? And what new fix period should she seek?
Ideally of course she wouldn’t need a doctoral degree in forecasting for this, she’d just speak to her broker. In fact, that was the first thing she tried. But, in her words, “The mortgage broker I spoke to wasn’t even willing to discuss this problem with me.”
Her experience is not atypical. Many brokers are at sea with this stuff. Some haven’t experienced rate rises in their working lives, let alone sudden rapid ones like this. And even for those that have, it’s hard for a regulated broker who is not an IFA to advise owners to pay a certain cost today for an uncertain future gain.
Nor is there much in the way of online tools to assist. The internet literally didn’t exist the last time a situation like this arose.
For what it’s worth, my business Nous.co was sufficiently animated by Lydia’s plight that we put together a calculator. It’s available for free at nous.co/refix. We don’t give mortgage advice, but we hope it is somewhat useful for anyone in a similar situation, if only to help think about what questions to ask of a broker (provided you can find one who’ll assist).
Mortgage-lending banks could also be pressed to do more. Early repayment charges certainly feel like ‘heads we win, tails you lose’ for lenders. Action now to cap early repayment charges, especially for those who aren’t even switching lenders but simply acting early to secure a new rate, might prevent a catastrophic spate of defaults.
In the meantime, just as the pandemic gave us all a crash course in epidemiology, so the cost-of-living crisis is making us all macroeconomists. Let’s just hope we aren’t also expected to become quantum physicists any time soon.