One of the great problems with our collective financial psyche is we normalise whatever the current situation is. This can lead to bad decision making. I just found a wonderful little document, showing the history of UK base rates and the figures contain a stark warning for all mortgage holders…
This is well worth looking at on the day the Bank of England kept the UK base rate on hold at 0.5% for the 20th consecutive month. It’s easy to consider this to be a pretty standard situation, yet now take a look at it in a historical context with this document from the Bank of England’s website.
Bank of England UK interest rate history
(Note its a spreadsheet – the 4th tab is the key one)
Take a look at past years’ rates, for me it screams out:
“Today’s interest rates aren’t just low, they’re not even just the historic lowest rate ever, they’re 1.5% below the prior lowest in its 316 year history!”
Every one needs to realise the current interest rates are an anomaly. And while it’s a dire situation for savers, in many ways mortgage holders have “never had it so good”. Yet sadly, experience says good things don’t last in finance.
Interest rates could return to 5% (not a prediction just a statement), which in a historical context wouldn’t be particularly high, even though from where we are now it would feel like a rocket-paced explosion.
And the impact on the mortgage costs for any one on a standard, tracker or discount rate will be horrendous (see the mortgage guide or remortgage guide for full explanations). Past rates were 0.5%-3% above UK base rates, now many people with poorer credit scores or less equity are being locked in at 4-5% above base and that’s a ticking time bomb.
If interest rates do return to more traditional levels, this means people will be paying 9-10% on their mortgages. While of course it’s to be hoped some cheaper deals would soon become available, the current need for decent equity will leave many trapped on their existing deals. It’s a time bomb, and something those who have this type of mortgage deal need to think about. Hope for the best, and plan for the worst.