Interest rates, mortgages and a useless rescue
So the Bank of England kept interest rates at 0.5% again yesterday. This is good news for those with a mortgage, but not-so-good for savers and annuitants. However, following Bank of England Mervyn King’s ‘explanation’ last month, all eyes will be on the soon-to-be-released inflation report, expecting to show a sharp rise in UK inflation, and causing the inflation targets to be revised. Which mean they are fairly useless kinds of targets really.
So far, only two out of the eight faceless strangers who decide our interest rate fate have voted for an increase in rates but if inflation does spiral, an increase in rates will become more and more likely. That inflation will have increased is in no doubt- the rise in VAT alone will push the cost of purchase up- but Mervyn was adamant they would ride out any ‘spike’.
However, many predict an increase at some point this year, and as quarterly inflation reports are due in May, August and November, a betting man might like to bet his mortgage increase on one of those months.
And this is the essence of the Bank of England’s dilemma- raising interest rates to curb inflation is going to hit mortgage holders hard, perhaps too hard, and risks the actualisation of that bogeyman concept of the double-dip recession.
But enough of macro-economics, let’s bring it down to a more micro level. Your pocket. Anyone who is on a standard variable rate mortgage, has probably chuckled down their sleeve at a fixed rate fellow- with interest rates at 0.5%, standard variable is roughly 2.5%.
However, if standard variablers are only just coping financially now, how are they going to cope when interest rates rise as the inevitably will?
Your first option is to get a fixed rate. According to moneyfacts, the best 2 year fixed rate deal is 3.39%, rising to 3.59% and 4.29% for the 3 and 5 year options. But all of these require at 75% LTV, and, especially if you have bought in the last 5 years, this may not be achievable in the current market.
So what happens if your mortgage spikes out of your capability?
The Government will help you out. Won’t they?
Announced to much self-congratulation a few years ago, the Mortgage Rescue Scheme sounds like, well, it would rescue you if you were in difficulties, right?
In theory this is true, but in practice there are a number of hoops to be jumped through. The first point to note is that not everyone can get it. It is only available for three specific groups of people, where:
- you, or someone you live with, has dependent children (someone who is 15 or younger or a person aged 16 to 18 who is a full-time student) who live with you
- you are, or someone you live with is, pregnant or
- you are, or someone you live with is elderly, ill or disabled
Assuming you do fall into one of these groups, you also have to have exhausted your options with your mortgage company. And this is likely to require you contacting all your other (lower priority) creditors to ask for an ‘arrangement’. Which won’t affect your credit rating. Much.
You cannot ask to go on the scheme anyway- you have to be referred by your local council, who, in most cases, will need to be contacted by your mortgage company or citizen’s advice bureau (if you can find one). Which takes time.
You are then assessed against the criteria, which include an income of less than £60k, LTV ratio of not more than 120% mortgage to home value, and that you do not own a second home. I would personally love to meet someone earning over £60 grand with a second home who would apply for this scheme.
Do note, however, that “even if you are eligible for mortgage rescue, your local authority does not have to offer you mortgage rescue. They may think it is not suitable”. So there.
Anyway, the upshot is that if you do get onto the scheme, you may be offered a low rate loan to help you out in a period of temporary difficulty, or the Government will put you in touch with a social housing scheme who will buy your house from you for 97% of its value, and rent it back to you, at a discount of 20% of local market rates.
As you can see, it is not a simple process, there is no guarantee of success even if you meet the criteria, and it takes time. Once you have been approved for the scheme by your local authority, it takes at least three to four months to go through. If you consider the likelihood that you may have been behind on your payments for some time before entering the process, you can see why mortgage lenders might be more inclined to go for a repossession route…