With the recent interest rate rise, from mortgages to savings, the public is still awaiting movement in the financial sphere. Below Paul Richards, Chairman of Insignis Cash Solutions, explains to Finance Monthly what 2018 holds for savers.

The Bank of England November rate rise has triggered a waiting game among banks. The government’s move to extend the rise to NS&I savers puts more pressure on competitors to do the same, but savers have still only seen the full benefit with a handful of banks. Most banks are still waiting to see what competitors do, or passing on only a fraction of the rise.

Some economic commentators point to two further interest rate rises in 2018, but protracted Brexit negotiations could delay this. If the Bank of England hikes rates again, it will once more be the government’s decision on NS&I rates that influences whether other banks will follow.

No savings provider wants to pay more interest than they need to, as it has a direct impact on their profitability. Margins have been compressed heavily since the global finance crisis and banks don’t want to see them fall further. Challengers are more hungry to grow their balance sheets via retail deposits, so we’ll likely continue to see better rates from these players than the traditional larger banks.

February 2018 will see the end of the £100 billion term funding scheme, a source of cheap borrowing for banks. Once this scheme is closed, appetite for retail deposits will increase, prompting more competitive rates in the market. Longer term the impact will be even more significant, banks have four years to repay money to the scheme, and will need to rely on retail deposits for some of these funds.

For several years a large amount of banks’ budgets and human resources have been dedicated to managing regulatory change. This drain has likely prompted unintended consequences for consumers; if banks hadn’t had to spend so much money on implementing new regulation, would we have seen the same level of branch closures?

But there are huge benefits from regulation, driving increased consumer protection and access to better deals. Open Banking and PSD2 are the most interesting areas to watch - both open up, with consumer consent, bank transaction data to power new financial tools. These will help people better manage their money and access the right deals for them. A wide range of fintechs across the UK, including Insignis, are working hard to develop new solutions and over time consumers will feel a real benefit to their day-to-day lives.

Some banks are further advanced with their Open Banking plans than others, and there are challenges to grapple in terms of data management and security; however, there’s no question that 2018 will be a year of huge advances that give consumers more control over how they manage their money.

Today reports indicate the FTSE closed on a record high yesterday, outperforming its already high record from Friday last week, following the Bank of England’s anticipated decision to raise interest rates from 0.25 to 0.5% last week.

The truth is, this changes a lot, from mortgages to bonds. Below Finance Monthly hears from many sources on Your Thoughts, how consumers should behave, how banking may evolve, how profits can change, what might happen to the pound in weeks to come and so forth.

Anthony Morrow, Co-Founder, evestor.co.uk:

In theory, the rise in the interest base rate should mean that consumers get higher interest rates on their savings. However, people shouldn’t get too excited about this. It often takes many months for the changes to be felt in savings accounts, and even then, the increases in savings rates can be marginal and may take years to build into noticeable rates of anything over 3%.

Consumers should also consider that the increase in base rate still means that their cash savings are playing catch-up. The past decade of interest-rate squeezes has meant that the value of cash savings have dropped instead of increasing in value.

The best course of action is for consumers to spread their savings and investments, and to look for alternatives to the traditional high street savings accounts and cash ISAs. It’s now easier than ever for consumers to invest money via the internet in stocks, shares and global investment funds that could generate average returns of between 5% - 7%. The key thing though is to ensure people get advice about what to do with their money before they part with their cash – this isn’t always readily available – and to check any charges that they’re likely to incur for making investments. In some cases, excessive fees can eat massively into the investment returns, sometimes by as much as half.

Gianluca Corradi, Head of Banking, Simon-Kucher:

Investors with shares in UK banks can cheer as the rate increase will boost the operating profits in the retail banking industry by £274 million over the next 12 months. This 3.1% increase in the operating profit of the banks will be positive news for the shareholders as the U.K. banks have had their profitability squeezed in a low rate environment despite numerous cost cuts and efficiency increase measures.

The gain for shareholders is expected to come as banks increase the lending rates immediately but deposit rates only gradually and by a lower amount. We can expect the banks to immediately increase the interest charged on new loans and those on variable rates by the full 25 basis points (bps), giving a boost of about £1.26 billion in their interest income for the coming year. Concurrently, the interest expense on deposits is likely to rise by just under £1 billion as the rates for savers rise over time.

Consumers can expect modest returns on their deposits as rates, though higher, will still be low in absolute terms. For instance, a saver who manages to get the entire 25bps increase on £10,000 of deposits, would stand to make an additional £25 over a year.

Paresh Raja, CEO, MFS:

In light of rising inflation and stagnating economic growth, the decision to increase interest rates for the first time in a decade comes as no surprise. Nevertheless, it is important to note that the rise in interest rates will place an added financial pressure on first-time buyers and buy-to-let investors needing to borrow money. While the impact on the UK property market may not be immediately obvious, there is no question that this month’s upcoming Autumn Budget now takes on greater significance as it must find ways of alleviating stress and providing support for property buyers. With the interest rate now sitting at 0.5%, this is a prime opportunity for the Government to address issues like real estate demand and Stamp Duty to ensure the market remains buoyant and readily accessible for homebuyers and investors alike.

Angus Dent, CEO, ArchOver:

This rate rise of 0.25% is largely symbolic. At the same time, it’s also a year too late. Dropping the interest rate below 0.5% was the wrong decision in the first place. The Bank should have pushed rates up to 0.75% as a show of strength that would have driven inflation down as the pound rose.

Although this rise is unlikely to have any major material effects, it is a return to the trajectory we should have been on for the past year, and a good sign for a bolder policy. For many, the move towards a higher interest rate will simply mean business as usual.

Following the financial crash, there is a hunger to make up for ten lost years and UK savers and investors are finally waking up to the realisation that they need to chase higher returns. With interest rates remaining below 1%, this means looking for opportunities to branch out beyond traditional vehicles and introduce greater diversity into portfolios to secure a higher yield.

Emmanuel Lumineau, CEO, BrickVest:

This announcement is momentous for the UK economy and should signal the start of a series of gradual increases. The Bank of England has decided that inflation is potentially getting out of control and the economy now requires higher borrowing costs. The decision also signals that the UK economy has not performed as weakly as the Bank predicted last year.

Increasing interest rates has a direct impact on real estate. Higher interest rates and rising inflation make borrowing and construction more expensive for owners, which can have a constraining effect on the market but can also lead to an increase in property prices. There has certainly been an abundance of international capital flowing into real estate, almost every major institutional investor globally has been increasing their portfolio allocation to real estate over the last five years mainly because of lack of alternatives.

We continue to see the highest level of volatility from the office sector as many international firms currently headquartered in the UK put decisions on hold over their long-term office space requirements. If the UK no longer gives businesses access to the European market, they may need to spread their staff across multiple locations to more efficiently access both the UK and European market. Indeed our recent research showed that 34% of institutional investors believe the biggest real estate investment opportunities will be found in the office sector and the same number in the hotel & hospitality industry over the next 12 months.

Uma Rajah, CEO, CapitalRise:

The Bank of England’s decision to raise its base rate of interest from 0.25% to 0.5% might superficially look like good news for savers, who have had to live with near non-existent returns on their deposits for some time. But in reality it is highly unlikely that banks will actually pass on much — if any — of the rate rise to their customers. It’s more likely they will act to increase their margins, focusing on improving their own profitability rather than doing what’s best for customers. Savers should take note and look for alternative, more lucrative, ways to grow their pot with minimal additional risk. While the base rate will continue to rise over the next 12 to 18 months, it could be some time before banks pass on the benefits.

Meanwhile, the rate rise is bad news for property developers and borrowers that are using banks to finance their loans. Banks charge based on a margin to LIBOR, which will go up in line with the base rate rises. Combine this with other longstanding challenges in securing finance from banks for real estate projects in the current climate, and property borrowers will be much better off looking at more innovative sources that can deliver finance more quickly and offer better value — particularly if the rate continues to rise over the next 12 to 18 months.

James Bentley, Trader, Learn to Trade:

Following the Bank of England’s announcement that interest rates are rising by 0.25%, the British central bank will hike borrowing costs for the first time in more than 10 years due to the recent surge in inflation.

Many economists have warned that the time is not right for a hike as recent data has painted a subdued picture of the economy while uncertainty over how Britain's withdrawal from the European Union will play out remains. With Brexit negotiations still underway, British consumers should prepare themselves for further fluctuations to interest rates over the next year.

The pound has pushed higher against the dollar in early trade, while London's FTSE100 searched for direction ahead of the announcement. Although the announcement has created uncertainty, we expect inflation to drop to 2.2% by 2020 - where the rate will stagnate and hold for a period of time.

Paul Davies, Director, Menzies LLP:

Even though the rate rise was well signposted by Mark Carney, it will bring hardship for businesses that rely on consumer spending.

Consumers are always wary of a rise in interest rates and we may see the retail industry experiencing a bumpy ride as UK shoppers tighten their purse strings. Businesses can defend against the effects of turbulence by ensuring cash management is a top priority, managing creditor payments and adapting to changes across the supply chain.

Consumers and businesses will be hoping that after the announcement, any further interest rate rises will be staved off until well into the New Year.

Mihir Kapadia, CEO and Founder, Sun Global Investments:

The Bank of England has given in to the rising inflation, which has been above their 2% target and peaking at 3%, by raising interest rates for the first time in a decade. While the interest rate hike bodes well to support the pound, it also increases the borrowing costs for consumers and business. It will mean an increased squeeze on consumers with loans and mortgages, thus nipping their spending and in turn affect the economy. It may well turn out to be a vicious loop, especially as Brexit woes continue to weigh down on the UK’s economy.

The last the time the Bank of England had increased the interest rates was in July 2007, when it pushed the cost of borrowing to 5.75% months before cutting them during the onset of the financial crash of 2008. This increase comes at a time when the economic framework has stabilised and careful credit scrutiny is in place to prevent another crash. The interest rate hike may well deter consumers from accessing cheap credit, which will bode well for the financial watchdogs.

The next interest rate hike may well take a while, until further clarity emerges on Brexit’s impact on the UK economy. Until then 0.5% is the only sword to battle 3% inflation, and curtail it from strengthening any further.

Frazer Fearnhead, Founder and CEO, The House Crowd:

I sincerely hope all the banks will have given as much thought and effort to increasing interest rates for investors as they will have given to helping people maintain their mortgage repayments and loan agreements”. He added “For the past decade investors have been forgotten and suffered derisory levels of returns on their savings. So, it is crucial that banks, increase interest rates on savings just as quickly as they increase interest charges to borrowers.

Gregg Davies, Company Director, IMA Financial Solutions:

We all talk about the winners and losers when Bank of England interest rates are mentioned. Of course, if you have savings on deposit in variable rate accounts, or a variable rate mortgage you could be affected directly.

Many are asking, will the rate rise make my mortgage more expensive? Most mortgage lenders offer fixed or variable rate mortgages, and many have already adjusted their fixed rate deals ahead of the speculation over an interest rate rise. Variable rates are either based on a lender’s own set variable rate or linked directly to the Bank of England – called trackers.

We have now had nearly eight years of unprecedently low rates - for a generation of first time buyers, low interest rates are all they have known.

Mortgage holders have taken the low rates on board, and today it is estimated that over 70% of mortgages are fixed rate deals – compared with a low of under 40% in 2001. On a day to day basis this is reflected in my own clients’ decisions.

Rob Douglas, VP of United Kingdom and Ireland, Adaptive Insights:

For many businesses across the UK, the rise in interest rates and subsequent fall of the pound will require action. Companies are operating in the midst of a volatile market, where the sterling went from being at its strongest since the Brexit vote, to taking an immediate tumble after the rise in interest rates was announced. This market instability can upend budgeting and forecasting, making it difficult for finance and management teams to devise an accurate financial plan and make business-critical decisions.

Economic and market volatility require businesses to be as agile and adaptable as possible to ensure their financial planning models reflect changing assumptions and conditions. To do this, companies must plan in real-time, with current data from across the organisation, so that they can mitigate potentially damaging consequences, such as a negative impact on profit margins. What’s more, businesses should prepare to be more responsive by running ‘what if’ scenarios in advance that will, for example, reveal the impact the rise in interest rates could have on their business, allowing them to make better, faster decisions.

Ultimately, it is the companies with sound financial planning processes in place that will have a better chance at success when volatility strikes.

Johan Rewilak, Economics Expert, Aston Business School:

Since the crisis of 2007, interest rates have been at record lows, and whilst this hike has only moved them back to pre-Brexit levels, the larger worry is about any future potential rises.

Since the decision has been made, Mark Carney and the MPC have already faced lengthy criticism about how the rate hike will impact the economy. There are those who believe recession is around the corner and that there was a desperate need to maintain interest rates at the 0.25% level to prevent this.

Those advocating the rise have done so by optimistically looking at data that shows unemployment has fallen to levels unseen since the 1970s and that the rate of underemployment (those working part-time who wish to work longer hours) has dropped. Nevertheless, wage growth (a metric of longer term inflation) has remained subdued.

My concern is and will be surrounding financial stability. Household indebtedness and mortgage to income ratios are at troublesome levels and any hikes in interest rates mean higher repayments. If the interest rate hikes lead to recession, this will only magnify these issues and have cataclysmic effects on the financial system as it did in 2007. Whilst, higher rates may put people off from future borrowing, there is a tricky trade-off surrounding those already highly indebted.

The upshot of this rate rise is that at least Mark Carney has two rolls of the dice if Brexit negotiations or the economy starts to sour before negative interest rates become a possibility. That being said, why would anyone raise interest rates that may create a recession just so they have the ability to lower interest rates and to try cure the problem

John William Gunn, Executive Chairman, SynerGIS Capital PLC:

This was widely anticipated by the wholesale markets following the language of the MPC’s September statement. The main question mark was over any Brexit-related outlook uncertainty. As the market had been positioned for this rise a failure to follow through could have caused the MPC credibility issues and sparked yet more speculation around Brexit headwinds to the economy.

For the general public, the good news is that more people are on fixed rate mortgages than ever so the effects for homeowners should be subdued. More people are renting and many households are lucky enough to be mortgage-free. As mentioned in the MPC statement, debt servicing costs paid by British households would remain "historically very low" despite this hike.

It’s not so great for first time homebuyers (many mortgage deals were withdrawn in anticipation of the BoE’s move) but attention now turns to whether the Chancellor can offer any stamp-duty concessions in the Budget on 22^nd November.

It's good news for neglected savers and the retired. While still low, retirees shopping around for annuities should already be seeing improved rates. Not all high street banks will be passing this rate rise onto their savers. Some committed ahead of the decision but they were in the minority.

As with the FOMC (the Federal Open Market Committee = equivalent of the MPC) in the US, the first interest rise is psychologically important, as it reminds borrowers that base rates for the last 10 years are not at “normal” levels. It should not be forgotten that for the U.K this is just a reversal of the post-Brexit-result emergency cut in Aug 2016. Any pre-Christmas consumer sentiment change may affect spending at high street retailers who have had mixed trading results recently. As with the U.S central bank guidance, we expect any rate rises over the coming years to be on a slow and gradual basis.

Given the modest growth forecasts issued by the MPC and their expectation that inflation with peak at 3.2% in the October CPI release, we do not anticipate any further tightening from the MPC until Q3 2018. The Brexit influence is unlikely to go away soon, as noted by the MPC in their statement.

Duncan Donald, CEO and Head of Trading, London Academy of Trading:

Last week we saw the UK MPC and Mark Carney deliver a rate hike in the UK to 0.5%, the first hike since the financial crisis in 2007.

It came as little surprise, with the market pricing in a 90% probability of this action prior to the announcement on “Super Thursday”. The act of hiking rates is perceived as ‘Hawkish’ and would typically drive the currency higher, but the price action reflected this was all but priced in.

The other positive element of the meeting, was the split of the voting members of the committee. The result was 7-2, showing that 7 members of the committee were in favour of the hike, with just 2 members dissenting. Forecasters had thought the split may be tighter, with a 6-3 or 5-4 majority to hike. These being the first two factors announced to the market, saw the pound appreciate half a cent against the dollar from 1.3220 to 1.3270. This move was sharply unwound as the market plunged over 2 cents to 1.3040.

The driver was the announcement that Mark Carney and his committee anticipates just two subsequent hikes, and not in the next year but over the next 3 years. This signified that in the short term we are very much looking at the ‘one and done’ scenario. The fears of Brexit and the unknown have perhaps rightly got the committee apprehensive of doing too much too soon. This was further underlined at the weekend, with comments from Mark Carney regarding fears of inflationary pressures that could be caused if we were to leave the EU without a deal.

Market traders and investors still question Carney’s ability to actually deliver what he says he will, in this case to raise interest rates. This was the market opinion in the UK and in his previous position in Canada. He delivered on the interest rate hike, but as the markets reflect, it was done in the most dovish of manners.

We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!

Following the first increase in the Bank of England’s base rate in over 10 years, MoneySuperMarket’s money expert Sally Francis here provides some guidance for people who might be affected.

Sally said: “There’s been very little movement in the Bank of England base rate since 2009 so it’s understandable that most Brits aren’t sure how a shift could affect their finances. The 0.25% rise might seem small, but it could pave the way for a string of increases that could impact some of the biggest bills. We’re encouraging people to take control of their finances today and learn how any future changes could affect their money.

“A rise in the base rate, coupled with the end of the Funding for Lending scheme - a Bank of England incentive for financial institutions to borrow cheaply from it -  early next year is good news for savers, but if you’re on a tracker mortgage your monthly instalments will rise as soon as any base rate increase is announced. If you’re on a capped or discount mortgage, you could also see increases so acting immediately could save you thousands in the long run, especially if base rate continues to rise. Switching to a fixed rate mortgage ensures that your monthly repayments stay the same for the duration of your fixed period, providing certainty and stability in your finances.”

For those with variable mortgages, the base rate rise might lead to higher monthly repayments, so here are MoneySuperMarket’s top tips:

1. Cheaper mortgage - If you’re on a variable rate mortgage, you could switch to a cheaper deal. But you might incur fees and charges, so work out whether it’s really going to save you money
2. Offset option - You could ask your lender about ‘offsetting’ your mortgage. This is where your savings and current account are stacked up against what you owe, and you’re only charged interest on the balance. Mortgage = £200,000, savings = £15,000 – you pay interest on £185,000
3. Switch energy - If you’ve never switched provider or haven’t done so for several years, you’re probably on a standard variable rate tariff. Switching to a fixed rate deal could save you hundreds of pounds a year
4. Don’t auto renew - Car and home insurers love it when you renew with them. Instead of rewarding your loyalty they often punish you with a price hike. So be a new customer every year and get the best deal in the market.
5. Max your bank account - Been with the same bank for years? There’s a new breed of current account that pays interest or gives rewards for certain types of spending. And you might get a £100+ cash incentive to switch.

(Source: MoneySuperMarket)

As expected, Mark Carney and the Bank of England have risen the UK interest rate for the first time in 10 years, stating that: “The time has come to ease our foot off the accelerator”.

The rate has risen from 0.25% to 0.5%, returning it to the same levels it was prior to a drop following the Brexit referendum result in June 2016, a move designed to stabilise the economy during a tumultuous market in the wake of the landmark vote.  The MPC (Monetary Policy Committee) voted by a score of 7-2 in favour of an increase, but has sought to curb any major fears of a quick rise and retain a level of cautiousness by stating in its report that, “All members agree that any future increases in Bank Rate will be at a gradual pace and to a limited extent”.

The rate rise has been expected to happen for some time and is seen by many as a direct response to protect British households from creeping inflation.  Mark Carney, Governor of the Bank of England, is tasked with keeping inflation at a target mark of 2%, however September saw it rise to 3%, its highest figure since 2012.

The rate increase was also announced in tandem with an upgrade on the growth forecast for this year, which has been raised from 1.3% to 1.5%.  The projections for 2018 have also been upgraded, and while this may sound promising for those who championed leaving the EU, the Bank of England has been very clear in asserting its position that Brexit is, and will remain, harmful to the UK economy.  The report states that Brexit is causing ‘noticeable impact on the economic outlook’, citing the ‘uncertainties associated with Brexit’ and ‘Brexit-related constraints’, as having a detrimental effect on the financial system.

For the average UK citizen, there are some concerns that the cost of borrowing will now increase and therefore negatively impact those applying for mortgages and loans.  The move is also expected to affect homeowners on interest only mortgages who have been enjoying low repayments with the potential to increase monthly payments.  With nearly 4 million homeowners currently on variable or base-rate trackers, an increase of up to £12 per month could be seen for those with the average repayment loan of around £90,000 on their mortgages.  There is also concern that many people who have never seen a rate-rise in their lives will be caught unexpected, and this could further squeeze a population where falling wages and consumer debt are prevalent.

The British pound fell sharply immediately after the announcement, but many analysts are still seeing this as a ‘one and done’ rise and do not expect to see any further changes emanating from the Bank of England until the terms of Britain’s Brexit is defined.

The Government estimates that between 225,000 and 275,000 homes need to be built per year to keep up with the rate of demand, however only 147,960 have been built for 2016/17 so far.

Many believe that this is because there is not enough money to buy the houses once they are built, as people cannot afford to get on the housing ladder due to the difficulty in saving enough deposit in order to get a mortgage, but this is not really the case as property priced at the more affordable end of the market, tends to be snapped up pretty quickly. In addition, the mortgage market has improved significantly and higher loan to value mortgages are once again available, although not at 100% loan to value as they were before the credit crunch.

There has been criticism over the government’s promise of a £2bn injection to help with funding to build social housing, as Downing Street aides have stated that this will only fund 5,000 of the 60,000 extra new houses needed to be built each year.  Funding is certainly not the major issue and we look at the main problems surrounding building more houses:

Loss of workers thanks to credit crunch and Brexit

When the credit crunch first hit in late 2007, 100% and high loan-to-value mortgages literally disappeared overnight. It happened so fast that even mortgage offers already in place were not honoured as lenders’ funds disappeared. The difficulty obtaining a mortgage made the desire of buying a house nearly impossible for a lot of people. Less people to buy houses impacted builders and property developers very quickly and left them with a lack of work. The demand for tradespeople such as carpenters, plumbers, electricians, bricklayers, etc. was decimated. It is important to realise that this was not a gradual decline over a number of years, it was a massive decline that happened over a matter of months.

The industry shrunk quickly and many people lost their jobs. As so many people skilled in the same trades lost their jobs and were unable to find more work doing the same thing, they were forced to find work outside the building industry and re-train in different sectors.

Over the last ten years, less people have entered the building industry due to lack of job prospects. Now the demand is back and prices are high again, more people will be needed in order to build more houses. Unemployment figures across the country are low so not many workers will be looking for jobs and to add to this problem, many European workers who filled lower paid roles have returned to their home countries due to the stronger Euro and concerns about Brexit. To get more workers, the roles offered will have to be more attractive which will push the cost of building the new houses up further.

Is there longevity in the building industry with the uncertainty of Brexit looming?

When demand for new houses disappeared and jobs were lost, the production of building materials slowed, and for some manufactures, ceased altogether. To build more houses we will need more materials – but the factories have not been waiting on standby for all of this time. To increase the supply of materials, manufactures will have to commit to more production, meaning costs of finding new premises and employing workers.

As specialist bridging loan brokers, many of our customers are business owners and property developers. They tell us that they are reluctant to commit to any new ventures that could be risky at the moment due to the uncertainty for the future, mainly caused by Brexit. Until the country faces a more stable future, many individuals responsible for making decisions needed in order for us to move forwards and build more houses will be remaining cautious and unlikely to spend huge sums of money opening factories or training new workers as they just do not know if it will be profitable, or indeed if it could actually prove very costly.

(Source: Key Loans and Mortgages Ltd)

Today, the 5^th July 2017, marks the ten year anniversary of the last time there was an interest rate rise in the UK.

On this date in 2007, the Monetary Policy Committee voted to increase rates to 5.75%, just as the wheels were about to come off the global economy. A decade on from the last interest rise, the Bank of England is once again mulling a rate hike, though the current level of consumer debt leaves the central bank facing a tightrope walk on interest rate policy.

• 8 million Britons haven’t seen an interest rate rise in their adult life
• £1,000 cash in the bank is now worth £878 after accounting for inflation
• This compares to £1,323 from £1,000 invested in the stock market
• Money in non-interest bearing accounts has risen almost eightfold to £179 billion
• UK consumer borrowing is higher than on the eve of the financial crisis… and rising
• The Bank of England bind
• Charts and tables

Laith Khalaf, Senior Analyst, Hargreaves Lansdown: “It’s been a decade since the last interest rate rise, so it’s little wonder that borrowers have got used to the idea of cheap money. Indeed around 8 million Britons haven’t witnessed an interest rate rise from the Bank of England in their adult lives.

Low interest rates undoubtedly helped to prop up the economy in the wake of the financial crisis, by lowering the cost of debt for UK consumers and companies. However the burden of loose monetary policy has very much fallen on those with cash in the bank, who have seen the interest they receive wither away to virtually nothing.

Meanwhile the UK consumer has even more borrowing now than ten years ago, thanks to weak wage growth and the addictive nature of low interest rates. Rising house prices and the increased cost of a university education mean that the current generation of young adults are particularly accustomed to eye-watering amounts of debt.

There has been a sharp rise in consumer borrowing over the last year, and current conditions of weak wage growth coupled with rising inflation are likely to exacerbate the use of credit to fund living expenses. Indeed the savings ratio has now fallen to a record low, highlighting the squeeze currently facing UK consumers.

The fragile debt dynamics of the UK economy put the Bank of England in a bind, because while a rate hike would help to curb consumer borrowing, it will also make the existing debt mountain less affordable. The central bank therefore faces a tightrope walk between keeping borrowing levels in check, without putting too big a dent in consumer activity, which would have a damaging effect on the UK economy.

The Monetary Policy Committee has turned more hawkish recently, and expectations of a rate rise have built up considerably in recent weeks. However the large amount of consumer debt means that even when the Bank of England does finally decide to wean the UK off low interest rates, it will be a very slow and steady process.”

The cost for cash savers

Those with cash in the bank have now seen a decade of falling returns. £1,000 stashed in a typical instant access account in July 2007 would now be worth £1,107. However after factoring in inflation, which has risen 26% over the period, the real value would today be £878. By comparison the same £1,000 investment in the UK stock market in July 2007 would now be worth £1,666, or £1,323 after adjusting for inflation. (Returns calculated with interest and dividends re-invested).

This is a pretty astonishing result, seeing as this investment would have been made just as the UK stock market was about to fall by almost 50% as a result of the financial crisis. These figures highlight the healing power of time on stock market returns, even if you happen to be unlucky enough to invest just as conditions take a turn for the worse. The figures also demonstrate the toll taken on cash in the bank by such an extended period of low interest rates.

Indeed, over the last ten years the amount of money held in non-interest bearing accounts has risen almost eightfold, from £23 billion in 2007 to £179 billion today. At the same time the average rate on the typical instant access account has fallen from 3.3% to 0.4%, and the average rate on non-instant access accounts (including cash ISAs) has fallen from 5% to 0.9%.

(Sources: Bank of England, Thomson Reuters Lipper, Moneyfacts)

The benefit for borrowers

While cash savers have undoubtedly felt the pinch from lower interest rates, there have been benefits for borrowers which have helped support the economy. The typical mortgage rate has fallen from 5.8% in July 2007 to 2.6% today, helping to support household incomes and the housing market in the wake of the financial crisis. Unsecured consumer borrowing rates have fallen too. The result is much lower levels of consumer loan defaults. UK lenders have written off £2.5 billion of bad consumer loans over the last year, this compares to £6.8 billion in 2007.

Borrowing costs have also fallen for UK companies. The typical borrowing cost for a large company with a good credit rating has fallen from 6.4% in July 2007 to 2.8% now. This has allowed companies to gain access to funds cheaply, thereby supporting them in making investments and profits, and providing employment.

Low interest rates have therefore helped the economy by reducing the burden on UK consumers and companies. However it seems consumers are now increasingly taking advantage of low interest rates to load up on debt, which is causing concern at the Bank of England. Only last week the ONS published data which showed that the UK savings ratio has fallen to a record level of 1.7%, which suggests the consumer squeeze is beginning to hit home.

(Sources: Bank of England, Markit iBoxx)

Consumer credit warning signs

The Bank of England recently warned that consumer credit and mortgage lending were a key risk to financial stability in the UK. This is because there has been a rapid increase in consumer credit of late, which rose 10% over the last year. As a result the central bank is bringing forward an assessment of the banking sector’s exposure to potential losses stemming from stressed conditions in the consumer credit market.

In absolute terms, levels of UK consumer debt are actually higher now than they were on the eve of the financial crisis, a point in history when it is widely recognised that the UK was living beyond its means. Consumer borrowing (including credit cards, overdrafts and loans) now stands at £199 billion, compared with £191 billion in July 2007, and a highest ever level of £209 billion recorded in September 2008. Mortgage borrowing now stands at £1.3 trillion, up from £1.1 trillion in July 2007.

The good news is household income has also risen over this period, which along with low interest rates make this debt more affordable. In 2007, the household debt to disposable income ratio peaked at 159.7%. This fell back in the years following the financial crisis as consumers tightened their belts and banks became more reluctant to lend. However it has recently started to head in the wrong direction again, rising from 139.9% in 2015 to 142.6% in 2016.

The Brexit-induced currency crunch facing consumers at the moment can be expected to put further upward pressure on this ratio. With wage growth weak and inflation rising, consumers are more likely to rely on debt, while their disposable household income is likely to come under pressure. Indeed in its latest forecasts the Office for Budget Responsibility predicts this ratio will hit 153% in 2022.

(Sources: Bank of England, ONS, Office for Budget Responsibility)

The Bank of England bind

This all underlines the very difficult situation the Bank of England finds itself in. Raising rates will help to wean investors off borrowing, however it will also make the large existing stock of debt more expensive, which will eat into monthly budgets, putting downward pressure on spending and weighing on economic growth.

This is perhaps why the bank has so far chosen to use more specialised tools to deal with the sharp rise in consumer credit, such as tightening up mortgage lending rules and increasing bank capital requirements to deal with any downturn in credit conditions, rather than wielding the sledgehammer of an interest rate rise.

However, more members of the monetary policy committee appear to be in favour of a rate rise, which may mean we could soon be in for the first hike since 2007.  Markets are now pricing in a 55% chance of a rate rise by the end of the year. However the fragile debt dynamics of the UK economy mean that even when the Bank does decide to raise rates, it’s going to tread very carefully indeed.

It’s also worth pointing out that this wouldn’t be the first time that expectations of a rate hike have risen only to be subsequently quashed. At the beginning of 2011, two years after rates had been cut to the emergency level of 0.5%, the market was expecting interest rates to be at 3% by 2014.

Charts and tables

The data behind these charts is available on request.

Here’s a summary of interest rate data:

The stock market fell sharply in 2007 and 2008, but has since staged a significant recovery, while cash has been left in the doldrums:

Consumer credit fell in the wake of the financial crisis, but has started to pick up again and is approaching a record level; weak wage growth and rising inflation are likely to stoke the borrowing binge further:

Low interest rates have helpd the economy in a number of ways, not least by making mortgage payments more affordable, which has helped to underpin the housing market:

Sources: Bank of England, Thomson Reuters Lipper, Nationwide, ONS

(Source: Hargreaves Lansdown)

Mortgage rates in the US fell for the third week in a row, with the benchmark 30-year fixed mortgage rate falling to the lowest level in more than six months, according to Bankrate.com's weekly national survey. The average 30-year fixed mortgage has a rate of 4.09%, the lowest since November 16th 2016, and an average of 0.25 discount and origination points.

The larger jumbo 30-year fixed slid to 4.02%, and the average 15-year fixed mortgage rate dropped to 3.31%, also the lowest since mid-November. Adjustable mortgage rates were mixed, with the 5-year ARM inching down to 3.41% while the 7-year ARM nosed higher to 3.60%.

Between inflation rates stalling out, consumer spending softening and ongoing questions about a White House scandal and its implications for policy initiatives, there is just enough uncertainty to keep bond yields and mortgage rates on a downward trajectory. Mortgage rates are closely related to yields on long-term government bonds, which appeal to investors any time uncertainty, or low inflation, is in the air. With a looming employment report for the month of May, investors will be looking for some confirmation of more robust economic activity in the current quarter than the anemic 1.2% annualized pace of growth in the first three months of the year.

At the current average 30-year fixed mortgage rate of 4.09%, the monthly payment for a $200,000 loan is $965.24.
30-year fixed: 4.09% -- down from 4.13% last week (avg. points: 0.23)
15-year fixed: 3.31% -- down from 3.32% last week (avg. points: 0.22)
5/1 ARM: 3.41% -- down from 3.42% last week (avg. points: 0.30)

(Source: Bankrate)

There were increased signs of a slowdown in the UK property market last month, as the number of sales has fallen dramatically and even less are taking out mortgages. Analysis by data firm Equifax claims mortgage sales dropped by over 15% between March and April. But why is this happening? Here Mark Homer, Co-Founder of Progressive Property explains more for Finance Monthly.

Mortgage transaction volumes have continued to reduce, dropping in excess of 15% in most regions of the UK in April 2017 versus March 2017. As new mortgages tend to mirror overall property transaction volumes the whole market appears to be taking a breather. Continuing uncertainty caused by Brexit, Britain’s relationship with the EU and more immediately the general election appears to have put buyers off at least for the short term.

House prices have continued to fall in Prime London and growth has continued to moderate outside of the M25 with the Midlands and North showing reduced growth too. Overall UK house price growth has slowed to 4.1% in the year to March 2017. With much of the rest of the UK playing catch up to the huge growth in Central London since 2010 the market appears to be taking a breather.

Increased Stamp duty on buy to let properties, 2nd homes and higher end properties from March 2016 has had had a further dampening effect on the market with many taking a “wait and see” approach to moving house. A new buy to let tax which sees mortgage interest become not 100% off settable against rent for many from April 17 has also contributed to a more negative mood.

Interestingly, first time buyer purchases have increased since the stamp duty changes showing that the government’s policies to encourage these purchases over those of landlords appear to be working. With some lender’s mortgage rates now reaching their lowest ever rates sub 1% buying a home has become more attractive.

House price growth seems set to return to trend with 5%+ growth once these uncertainties subside and wage growth catches up with prices following a period of increased inflation after sterling devalued immediately after the vote to leave the EU.

Mortgage sales for the UK fell by £2.62 billion in April, down 16.0% on the previous month, according to Equifax Touchstone analysis of the intermediary marketplace.

Buy-to-let figures plunged 20.4% (£0.55 billion) to £2.15 billion and residential followed suit, dropping by 15.1% (£2.07 billion) to £11.60 billion. Overall, mortgage sales for the month dropped to £13.76 billion.

Every region across the UK witnessed a slump in sales. The North and Yorkshire region led the way with the steepest drop of 18.5%, followed closely by London and the Home counties, with sales falling by 17.5% and 17.0% respectively.

John Driscoll, Director at Equifax Touchstone, said: “Mortgage figures have nosedived following a strong first quarter, with every single region experiencing a notable slump in sales. Government measures to cool buy-to-let property sales, including the phased cuts to mortgage interest tax relief which started on 1 April, have no doubt played a role in diminishing sales figures last month.

“This government intervention, coupled with uncertainty surrounding the election, means we’re likely to see more volatility in coming months. The big question is where figures will go from here – this time of year is traditionally fairly buoyant for house-buying, but there may be too much uncertainty on the horizon to see an immediate rebound.”

The data from Equifax Touchstone, which covers the majority of the intermediated lending market, shows that the average value of a residential mortgage in April was £198,347 (2016: £192,255) and £153,900 for buy-to-let (2016: £158,335).

Equifax Touchstone utilises intermediary and customer profiling tools to provide financial services providers with a detailed understanding of their marketplace and client base.

(Source: Equifax)

The housing and neighborhood location choices of immigrants will have a significant impact on urban growth in the US for decades to come, particularly as more foreign-born residents seek to own homes in suburban communities, according to new research from the Urban Land Institute's Terwilliger Center for Housing. Homebuilders and developers who can deliver the housing options immigrants want and need stand to benefit in the years to come.

Home in America: Immigrants and Housing Demand examines the influence of immigrants in shaping urban growth patterns, particularly those who have entered the US since the Great Recession (since 2010, the number of immigrants from Asia has surpassed those from Latin America). "Immigrants have helped stabilize and strengthen the housing market throughout the recovery," said Terwilliger Center Executive Director Stockton Williams. "Immigrants' housing purchasing power and preferences are significant economic assets for metropolitan regions across the country. This suggests the potential for much more growth attributable to foreign-born residents in the years ahead," he added.

Among the key findings from the report:

• Without growth of the foreign-population, regions with strong housing markets such as San Francisco would not have recovered as quickly following the recession; and markets that continue to struggle in the recession's aftermath such as Buffalo would have experienced even weaker growth.
• Immigrants have strong aspirations for single-family homeownership, and homeownership rates for immigrants rise with their length of time in the US This suggests that immigrants will be a key driver for owner-occupied housing for years to come.
• Immigrants seeking to own homes as well as those renting homes are increasingly drawn to the suburbs in search of employment opportunities, lower-cost housing and a higher quality of life. Suburbs are home to high-income, high-skilled immigrants as well as lower-income, lesser-skilled immigrants.
• While immigrants represent a key source of demand for new housing, a substantial share of immigrant housing demand will be met through purchases of existing homes. Sellers of these homes – many of whom will be baby boomers seeking to downsize – will create a strong market for smaller units.
• Urban areas experiencing significant immigrant population growth should explore how to best accommodate immigrants and leverage the positive effect they have on the housing industry and economy. Investments in housing, retail, recreational and cultural amenities, as well as social assistance and education programs can help forge a strong connection between immigrants, neighborhoods, and the greater community.
• Just as housing demand by immigrants was a key factor in tempering the worst impacts of the housing collapse, this demand is now helping to build housing market momentum. Demand for homeownership and for single-family housing, as well as the continued growth of both urban and suburban communities throughout the country, will depend on the trajectory of US immigration policy.

The findings in Home in America are drawn in part from analyses of the housing and neighborhood preferences of immigrants in five metropolitan areas that represent different types of immigrant gateways:

• San Francisco – a major continuous gateway, with a large and sustained immigrant population throughout the 20^th century and into the 21^st century (other examples are New York City, Chicago, Boston)
• Houston – a post-World War II gateway that has attracted large numbers of immigrants since the mid-20^th century (other examples: Los Angeles, Miami, Washington, D.C.)
• Buffalo -- a former gateway that was a major entry point in the early-to-mid-20^th century due to its strong manufacturing economy (other examples: Cleveland, Detroit, St.  Louis)
• Minneapolis-St. Paul -- a re-emerging gateway marked by a renewal of immigrants at the end of the 20^th century into the 21^st century (other examples: Baltimore, Denver, Seattle); and
• Charlotte – a major emerging gateway that started experiencing a wave of immigrants at the beginning of the 21^st century (other examples: Atlanta, Las Vegas, Orlando)

Home in America notes that foreign-born population growth in most of gateways outpaced overall population growth between 2006 and 2014 (the time period from just prior to the housing market collapse through the housing rally). Emerging gateways, which experienced strong overall population growth, were the only exception. The report also looks at the neighborhood choices of immigrants within the five metro areas, focusing on five categories of suburbs (typologies developed for ULI by RCLCO):

• Economically challenged suburb – characterized by lower home values and little population growth
• Stable middle-income suburb – having a wide range of home values, usually more centrally located
• Established high-end suburb – having high home values, established development patterns, often near employment centers
• Greenfield lifestyle suburb – close to the edge of metro areas, developed mainly in the past 15 years, typically adjacent to established high-end suburbs; and
• Greenfield value suburb -- close to the edge of metro areas, often adjacent to stable or economically challenged suburbs, more affordable than greenfield lifestyle suburbs.

The differences in where immigrants are locating in the five cities is an indicator of how they could influence future growth within these markets, the report says. In San Francisco, immigrants are spread across nearly all types of suburban communities, with the highestpercentage, 35%, living in economically challenged neighborhoods. In Houston, the largest share of immigrants, 39%, live in stable middle-income suburbs, followed by 29% in economically challenged suburbs. In Buffalo, 30% live in established high-end suburbs (a greater share than the native-born population) and 27% live in urban neighborhoods. In Minneapolis, the highestpercentage, 32%, live in economically challenged suburbs, followed by 27% in stable middle-income suburbs. In Charlotte, 27% live in economically challenged suburbs. Nineteen% live in stable-income suburbs and an additional 19% live in established high-end suburbs.

Home in America points out that the presence of immigrants could help boost revitalization in economically challenged suburbs; sustain the success of stable middle-income suburbs; and contribute to the growth and diversity of established high-end suburbs. "If recent shifts in immigration flows continue, an increase in higher-income immigrants – including rising numbers from China and India – could accelerate the demand for homeownership among the foreign-born population," the report says. "Without sustained immigration, the housing market could weaken and in many markets the impact could be dramatic."

(Source: Urban Land Institute)

With real estate markets in a bubble of volatility from year to year, mortgage rates due to rebound, and increasing purchase struggle for first time buyers, it’s about time we looked back through the years and really understood how we’ve arrived where we are today. This month Finance Monthly has heard from Tracie Pearce, Head of Mortgages at HSBC. Tracie gives us a rundown of mortgage history from day 1, and points towards the shifts that are set to further shape how buyers afford their bricks.

I’ve always had misgivings about birthdays. But a 21^st industry birthday taking us back to 1996, the year when the British Olympics team won 15 medals in Atlanta, Trainspotting was released and just 16% of households had mobile phones, feels worth a little retrospection. A lot has happened!

In 1996, I was an assistant analyst at specialist lender Sun Bank based in Stevenage, building and maintaining PCs and hardware for mortgage platforms. In that same year, 1996, a handful of lenders formed the Association of Residential Letting Agents (ARLA) marking the beginnings of the buy-to-let market with industry self-regulation in the shape of the Mortgage Code emerging the following year.

Through the 1990s, the building society sector, which did 72% of lending in the mid-80s saw further demutualisation but by 2000, the banks held sway with 70% of gross mortgage lending and mortgage brokers were estimated to be introducing just over half of this business.

The rise of the mortgage adviser

The early naughties saw the rise of the intermediated mortgage market, which brought mortgage choice and mass regulatory compliance ahead of the advice industry’s regulation on M Day, on 31 October 2004.

Disclosure documents including the Key Facts Illustration (KFI) became mandatory and more importantly advisers became Directly Authorised (DA) or Appointed Representatives (AR) to networks to comply with regulation.

The 2000s were arguably a fantastic time for the majority of mortgage consumers with immense mortgage product choice and loss-leading two-year fixed rates. There was easy access to credit fuelled by lender competition and record house price inflation hit 26.5% in January 2003, according to Nationwide.

On the timeline, was when I was lucky enough to be involved in launching The Mortgage Works brand. The market was buoyant, spirits were high and product innovation relatively fast and furious. It was around this time that the market moved from a position of bespoke products and pricing calibrated by risk, to more of a mass market offering and more agile processing timescales. Lenders were investing in automation, including conveyancer and valuation instructions and time to offer shortened to around 10-14 days, not so far from where we are now.

 Mortgage Strategy ran a hero and villain of the week column and all the lenders were vying for the hero of the week position but desperate to avoid being called out as the villain. It was just a bit of fun, but certainly showed what was motivating product teams at the time.

The economic crunch

Meanwhile, the downside, of course, was that this perceived ‘magic porridge pot’ of equity also arguably softened the perception of borrowing risk for lenders and customers alike. By 2007, gross mortgage lending had ballooned to hit £360bn – and then, the market imploded as the credit crunch hit.

The bleak economic period and soul searching that followed handed culpability to borrowers, lenders, advisers and the credit reference agencies, alike.

One of my most vivid memories was Thursday 6^th November 2008 when the Monetary Policy Committee slashed Bank Base Rate from 4.5% to 3% in one go, a really deep cut! The market was shocked. In the days and weeks that followed, products were withdrawn, lending criteria tightened and lenders retrenched to serving their direct channels first.

The FSA, was abolished on 1^st April 2013 and replaced by a twin peak FCA/PRA regulatory system, with a new steely zeal for conduct regulation under the leadership of CEO Martin Wheatley.

The Mortgage Market Review was initially signposted in 2009 but took until 26 April 2014 to finally arrive after full consultation. For a period, lenders struggled to meet consumer demand as they embedded processes and training to give advice (in some channels) for the first time. Brokers leaned in to bridge this capacity gap and the industry (on the whole) gave the regulator credit for an exhaustive, clearly-trailed process.

In October 2014 HSBC entered the intermediary market for the first time, which was one of the single biggest strategic changes the bank has ever made on the mortgage side. As the adviser market’s star rose and the regulatory landscape changed, the bank made a commitment to the intermediary market, which has brought successes for both sides and clear benefit for customers.

We started with a pilot one intermediary partner – Countrywide – and London & Country joined the panel in August 15, over the last 18 months, we have been methodically and systematically expanding our reach and we now have 16 intermediary partner firms, with around 7,000 individual brokers, with more on the immediate horizon.

We are committed to working effectively with our broker partners, ensuring the best products and customer service as well as continuous improvement to deliver a market-leading customer experience.

So, George Osborne’s focus on landlords and the buy-to-let market almost brings us up to date. The Chancellor announced changes to mortgage interest tax relief in 2015 which will gradually be reduced to 20% between 2017 and 2020. The Stamp Duty surcharge of 3% was introduced from April 2016 was the next in a raft of affordability-focused, tweaks, joined the rule changes bringing in tighter underwriting on 1 January.

Inevitably the plethora of rule changes have slowed it down a little but the market is professional and I believe it is resilient. I believe it has the strength to recover, albeit it may be in a slightly different guise. As lenders have adjusted credit criteria, landlords will rethink how they choose to invest.

Looking forward to evolution

The last 21 years have been a whirlwind, and there is no doubt the next 21 years in this industry will bring more change, surprises and evolution than the last.

Mortgage lenders are on the horns of several dilemmas. Lenders understand the value of common sense lending into sectors like later life, interest-only or self-employed mortgages but must be considerate of capital adequacy and conduct.

Speaking more broadly, the demographic imperative is that the UK must build more homes and the buy-to-let market remains key to the overall health of the housing market, so should be left to adjust and recover. Not all customers can or want to own their own homes so it is just as important to help those who want to rent a property. The government has recognised this with its commitment to supporting mixed tenure homes.

What about the adviser?

Advice will remain central to the mortgage process, but I suspect honed and supported by technology. Digitalisation is set to reinvigorate the homebuying and mortgage application journey for consumers. This could mean automated confidential documentation exchanges allowing all parties in the process easy access to the same proofs of identity or even online passports which offer instant authentication.

We are going to see more screen-to-screen technology supporting the customer conversation at the front-end, for example with a tablet or mobile device from the comfort of the customer's living room.

For the adviser, online fact finds will help speed up the advice process and authentication of documents and I see Digital Advice, known more generally as RoboAdvice, working particularly well for an execution-only sale for seasoned remortgage customers who may choose to sidestep or not need face-to-face advice.

I strongly believe that those who work in the mortgage industry are very privileged to work with a product that has such a deep emotional connection for the customer.

Getting your first home, buying a bigger home to start a family in, or somewhere to retreat to if your relationship breaks down are all hugely impactful purchases. It is our pleasure to do everything we can to help people through this process. HSBC aims to empower customers with the right tools and advice to help them become knowledgeable as homebuyers and learn as much as they want to during the process.

The competition commission reporting in the summer will have plenty to say on how we could achieve this and benchmark good practice. But it’s safe to say we’ll have just as much to do and think about over the next 21 years.

Website: https://www.hsbc.co.uk/1/2/