I know a few people are worrying about mortgage interest rates and are hesitating buying property because of that so let’s put the increases it in perspective. There are loads of complex and jargon-heavy articles in the financial press but we’re busy this time of year so this is a simple guide to what has been happening and why it’s not as bad as it may look.
While the FED (US Federal Bank) has just increased its key interest rate by 0.5% and the UAE, KSA, Qatar and Bahrain have followed suit that is not necessarily bad news. The ECB (European Central Bank) is expected to follow today. The US is the world’s largest economy so we are all affected by what happens there.
Inflation is a problem and cannot be allowed to run rampant as it quickly devalues incomes, put up prices and seriously damages economies.
Bank base rates, globally, have been increased several times in order to dampen that down and it is working.
US inflation peaked at 9.1% in June 2022 and dropped to 7.1% in November. Official inflation in the UAE is lower at 5.6% and the UK saw a small drop in CPI (Consumer Price Inflation) from 11.1% in October to 10.7% in November.
If bank base rates increase to limit inflationary pressure, it leads to an increase in the rate of borrowing and in mortgage interest rates. Your mortgage payments go up but it limit the increases in the cost of food, fuel, and all other items.
This chart shows UK mortgage rates from 1929 up to 2007. I have deliberately chosen a long term illustration as charts for the last 10 years are not helpful. Rates fell further after 2007 to historic lows before the recent increases.
What is clear is that while UK interest rates have increased in the past few months, they are still low compared to historical averages. Those of us of a certain age can clearly remember the painful mortgage interest rates of 14% or more.
We have had a period of unusually low rates of interest in the UK for many years so the current rates are normal. The average mortgage rate from 1995 to 2020 was 5.65%.
I am aware that borrowers are facing large increases right now, and that is painful and will cause difficulties for many, but it is important to be realistic when taking out any mortgage and to realise that recent low rates were an aberration in financial terms.
Lenders will often apply a ‘stress test’ which simply means they look at your overall financial situation to see if you would be able to meet your obligations if interest rates increased. It is why you need to provide details of your outgoings as well as income.
Some borrowers have claimed this is intrusive but it is for your benefit and a key part of financial advice is planning for the worst, or for future problems at least.
For this reason, I have always been a fan of fixed rate mortgages to help you budget.
We are not going to see a drop in bank bases rates any time soon but when it comes to UK mortgages, rates for new mortgages have dropped a little following the bounce upwards after the dreadful Kwarteng/Truss ‘fiscal event’ in September.
The current rates of interest should not put you off buying investment property and I recently wrote an article about why this was A Good Thing.
When it comes to buying property, especially as an investment, we also need to consider UK house price growth. As an average, over the past 50 years, this has been in excess of 9% per annum. That is higher than the interest rates currently payable. That means that even with paying interest, you benefit each year.
Factor in average annual growth in the value of the property, the fact that if you buy the right investment property – and they are not all equal – and receive a good rate of rental income, you can see that even with the interest payable, it makes sense as a long-term investment. And you do have to look at property for the long-term.
The whole world has some economic issues right now and inflation is hugely damaging to individuals, to corporation and economies so it does need to be steadied for all our benefits. That has meant a return to rates of interest from a few years ago.
Rental yields are increasing in many areas so that should partly offset an increase in mortgage repayments but as mentioned, you do need to buy in the right place. Too often people buy with emotion and receive a return of investment of just 3% when you can double that if you take expert advice on where and what to buy.
The message is that UK mortgages are not all as expensive as they might feel, not when you take a realistic long-term view. We can obtain a range of options for non-UK residents across the GCC as well as source the best investment properties.
If you are earning in US Dollars, or a currency linked to it, you have already benefitted from your money being worth 12% that it was a year ago, compared to Sterling, so in effect property is cheaper than it was.
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I write articles such as this one as part of the holistic personal financial planning service and that I provide to expats, and the general consumer, financial and legal information that I provide in The National newspaper, in other media, and on the Facebook group British Expats Dubai.
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