Interest Rate Warning – Rate Rises Explained
Let me caveat this with saying this post has been written on 28th September, they say a week is a long time in politics, it is almost a lifetime in economic terms…
The first thing to realise about interest rates is that they were never, ever, going to remain as low as they have been since 2008. The issue is that human behaviour demands only 66 days of doing something for it to become a habit, to become the norm. Base rates hit 0.5% on 5th February 2009, that is 4,983 days, well beyond the 66 required.
My point, low interest rates have long since become a habit we have all been used to. Shock horror, those days are over.
What does it mean?
- You have a commercial mortgage on a fixed rate and the deal expires next year. You are currently paying 5.39%
- The rate after the end of the fixed rate will default to 4.64% above SONIA. As of today SONIA is 2.19%, but the two year SONIA rate is 5.512%. The comparable two year fixed rate would be 5.512 plus 4.64, being 10.152%*
- That is a whopping 218% increase on the interest you are paying now
- If you look at what fixed rates are available today, a comparable five year fixed rate on semi-commercial property is 7.05%*
- This means that breaking your current rate and taking a loss now may leave you much better off
It is not an exact science and regardless of whatever anyone says, there are too many variables to consider to know what rates will be in one month, let alone one year or two years.
It is all about acceptance of risk. We all have an accepted level of risk. It is always hard to cut your losses, gamblers refer to it as chasing your losses, lenders refer to it as lending to avoid bad debt. Neither solution works even though our poor human brains find it appealing.
My big concern is this:
- That too many borrowers will compare rates now to what they were and not act to protect themselves as they see it as being worse off when the opposite is true
- That when fixed rates expire the cost of finance will be higher, meaning that the level of income on properties no longer supports the existing mortgage and borrowers have to pay down debt at a time they cannot raise new money to do so
Doing nothing leaves you open to both of these risks.
Please don’t fall into the traps.
By Dave Farmer
*Reference: ChathamFinancial 28/09/2022 & GuardianMoney 28/09/2022 & AllicaBank 28/09/2022