Does Mark Carneys call for 'mortgage prudence' suggest he believes there is ‘mortgage imprudence'?
Yesterday, Mark Carney recent called for ‘mortgage prudence’, so I thought I would have a go at bringing his plea to life!
Firstly a few assumptions; my example is a First Time Buyer, her name is Poppy.
Poppy has a 20k deposit and has worked out that she can spend a £1000 per month on a mortgage. She wants a 5 year fixed rate, capital and interest, over 25 years. – Poppy has found a deal at 2.70%. Nice work, Poppy!
So, for her £1000 per month and her 20k deposit, Poppy can afford a property with a ticket price £239,000. Not bad...
But, Poppy is savvy and has heard about Mr Carneys rate plan….she decides to wait.
Next, we are going to assume that Mr Carney stays true to his 'nudge and a wink' (AKA forward guidance) cutting rates, by say, 0.25%, and due to competitive pressures, lenders pass it on to Poppy.
Her rate is now 2.45%, she still has 20k deposit and £1000 per month. HOWEVER, her buying power has now increased to £245,000.
But Poppy waits further…
Carney has to cut rates further, to 0%, and once again lenders pass it on giving Poppy a rate of 2.2%. Poppy now has a healthy £251,000 to spend.
So, for no extra income or no additional outgoings or deposit Mr Carney has increased Poppy’s spending power by a staggering £12000. Prudence?
Now, Poppy may think this is great of course, and you wouldn’t blame her for that.
BUT when rates ‘rocket’ back to a Bank of England Base Rate of just 2% (a reasonable possibility at the end of Poppy’s 5 years fixed rate) and the lender passes it on to Poppy like a hot potato, her monthly repayment will rise from £1000 per month, to £1250 per month, a rise of 25% - way above the current rate of wage inflation. Mmm. Not so good, Poppy. That may look like imprudence in action!
And of course, not to mention the additional pressure this ‘extra’ affordability will place on house prices.
However, we are not all doomed; before we get too carried away that this ‘imprudence’ will become contagious, here are some reassuring industry statistics about First Time Buyers that may surprise you:
- Income Multiple: Despite what the media might tell you – First Time Buyers and lenders are being far from reckless – between 2007 and 2015 loan to income ratios have only marginally increased from 3.36 x income to 3.42 x income, indicating both lenders and Borrowers, are indeed, already being prudent. Especially when you consider my next point…
- Affordability: In 2007 First Time Buyer’s spent 24% of income on mortgage repayments, but by 2015 it was just 18%, suggesting a margin of comfort should rates increase or economic conditions deteriorate. Prudence in action, I would say!
So, about Mr Carney’s advice, Poppy: It seems you and your fellow First Time Buyers are already being prudent, the data tells us this. Whatever happens with Base Rate, just carry on doing what you are doing – you are doing just fine.
These are of course my personal views, and very much in my humble opinion!
Advascale- Co-founder I Airmed - Co-founder
2yChris, very insightful post.
An educated, balanced, well crafted and simply explained model of what the real world looks like and how responsible lenders AND borrowers are behaving.
Building Society Chief Risk Officer
9y"She wants a 5 year fixed rate..." In that case, the mortgage rate she will pay will be priced not off the current Bank of England Base Rate but off the 5 year swap rate which will already include embedded within it assumptions of where Bank of England Base Rate will be over the next five years. This is a key fact that many mortgage advisers and commentators seem to miss. Whether or not Carney cuts or increases rates is immaterial. What matters is whether or not he cuts or increases rates by more than the swap rate already expects. That's what determines whether Poppy is better off or worse off. Besides, if she's fixed, it's fixed. If Craney hikes or cuts rates she won't seen any immediate impact anyway.