Base Rate: The Only Way Is Up?
The Bank of England has announced that it is to keep interest rates at 0.5% while it assesses the impact of its moves to revive the economy through quantitative easing.
Expectations that the interest rate will remain at 0.5% follow a series of optimistic signs that the economy may have begun to emerge from the sharpest phase of the recession.
Consumer confidence has risen for two months in a row, and there have been indications that the crash in the housing market is easing, with mortgage approvals increasing from very low levels for several months. The Nationwide Building Society also reported that house prices rose by 1.9 per cent last month. Separate figures indicated that mortgage approvals also rose in February.
This may be "the start of the end" for the recession, but the remainder of 2009 may prove to be difficult for many Contractors, as many blue chip clients look to restructure and consolidate their cost base. This will inevitably result in a lack of contract renewals and rate cuts for the unlucky ones. Unfortunately there is not too much the individual contractor can do to influence the economic factors behind these decisions.
There is however, an opportunity for the contractor to take advantage of the current economic conditions by cutting the cost of personal outgoings. The mortgage is likely to be the largest of these. There are Contractors who may have delayed plans to buy a new home or remortgage over the previous 18 months. Now is the time to act for those who have been waiting for the property crash to start levelling off, and also those who have decided that the comfort of the standard variable rate is the cheapest option.
The average UK property price has dropped by 15-20% since the start of the credit crunch, which means that the required borrowing will be lower to acquire an asset that will probably appreciate in value over the longer term.
This is also applicable to those who have delayed remortgaging by staying on their lender's standard variable rate. When the base rate is near the bottom, there is only one direction it can go. Any sustained recovery will require the base rate to increase again, so it may be a good time for Contractors to secure a competitive fixed rate for protection against any likely increases.
When the economic recovery gathers momentum, interest rates are likely to increase sharply in tandem with this. The current base rate 0.5% now looks like the bottom as a further cut to 0.25% would make minimal impact on the economy, but instead would hit sterling. Therefore the question now is when will interest rates start to rise again, and how exposed am I?
Article by: Taj Kang - Associate Director, Contractor Mortgages Made Easy
Posted 15/04/09
