Speculation is rife about an impending change to base rate. There's no denying that it's coming but no-one really knows when, and this uncertainty is understandably taking its toll on the mortgage market.
It's homeowners themselves that are becoming particularly concerned. According to the latest Legal & General Mortgage Mood survey, 68% of homeowners fear a mortgage rate rise in the next 12 months, albeit a small one.
The majority of this group (45%) believe that rates won't increase by more than 1% and 52% don't think they'll increase by more than 2% in the next two years, with just 12% predicting an increase of 3% over the next 24 months.
However, the report also revealed that the historically low rates enjoyed over the last few years have distorted homeowners' perceptions of what 'normal' rates should be, with 25% of those surveyed feeling that 'normal' interest rates for a mortgage were between 1.1% and 3%.
The younger generation had particularly skewed ideas, with 26% of those aged 18-24 feeling that a 'normal' rate would be up to 1%, while a further 26% admitted that they didn't know exactly what a normal rate should be. However, this uncertainty was highest amongst those over 65, with nearly half (46%) saying that they didn't know what a normal rate was.
Jeremy Duncombe, of the Legal & General Mortgage Club, commented: "It is encouraging to see that a large proportion of homeowners understand that a rate rise is likely over the next 12 months, [but] despite this market awareness, the majority are still not actively seeking to remortgage while they have the opportunity to take advantage of historically low rates. This can perhaps be explained by the fact that so few people seem to know what 'normal' looks like.
"In the short-to-medium term, rates will go up and the market will return to levels we have seen previously. Borrowers should be planning now for a rate rise, and have a strategy in place which will enable them to cope with increased mortgage repayments."
It looks like this market uncertainty has been taking its toll elsewhere in the market too. House sales, for example, have been declining. Seasonally-adjusted figures from HMRC show that the number of house sales dropped by 0.2% in June, standing at 102,680, down from 102,860 in May. The figure may be 15.7% higher on an annual basis but it's noticeably decreased from the post-crisis peak of 109,500 recorded in February this year, indicating a subsequent slowdown in the market.
Although raw data paints a different story – the figures in this instance show that house sales rose to a joint post-crisis peak in June, hitting 109,580, the same as that recorded in November last year – using seasonally-adjusted figures, or those that take into account seasonal influences, is a far more accurate representation of a trend. In this case, that trend is one of a slightly cooling market, with sales coming under pressure from a combination of factors.
It isn't just concern over a change to base rate, either. Stricter affordability checks following the Mortgage Market Review (MMR) have undoubtedly had an impact on house sales, arguably making it more difficult for prospective homeowners to be granted a mortgage, while further Government tightening could serve to increase that pressure even more.
However, there are tentative signs that the market is adjusting and could return to normal. Additional figures from the British Bankers' Association (BBA) have revealed that mortgage approval volumes for house purchase recovered slightly in June following declines in previous months, indicating that lenders and borrowers alike are adjusting to the new mortgage landscape. It may not be easier to get a mortgage, but at least everyone knows what's happening.
Ultimately, whether or not approvals are increasing and no matter when base rate changes, the one thing that will affect borrowers most is the interest rate they're being charged. A higher interest rate will result in higher mortgage repayments – even relatively small increases could have an impact on household finances – and if you want to keep yours as low as possible, it's advisable to fix before it's too late.
Mortgage rates are inevitably going to rise in the future and they're already starting on an upwards trajectory, so make sure you find the best fixed rate deals, ideally by using our best buy tables, so you can be confident that your rate won't jump up as soon as base rate starts to rise.
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