Death by a thousand cuts?

The budget promises death by a thousand cuts but if it’s light on detail at the end of June then more will come in the spending review. This is even more likely following the announcement by Fitch, one of the world’s biggest credit rating agencies, warning that the Government must cut spending by some £86bn, equivalent to the entire NHS budget, over the next five years to maintain Britain’s reputation with international investors. Fiscal policy sends signals to markets and citizens alike about a Government’s intent and will tell us how fast and how profoundly we are willing to tackle the deficit. In this case the Government must act decisively and quickly to avoid the danger of falling into a double dip recession and to ensure that World opinion of the UK remains positive.

As mortgage practitioners, we are all reading the runes to determine when the market will get back to something resembling normality. While fiscal measures will affect confidence, in the form of likely job security – specifically in the public but also the private sector – wages and the abolition of certain public service projects, monetary policy is equally important to the long term health of the home-owning market.

Interest rates have been on hold at record lows for many months now, effectively putting money back into the pocket of borrowers on SVR or tracker rates. Should wage inflation kick in then interest rates will go up and the pain for thousands of borrowers will become more acute. Of course a burst of remortgage activity may be no bad thing but remember that many borrowers on interest only mortgages may not be in a position to find a like for like affordable deal. Indeed more and more lenders are turning away from interest only mortgage deals with some encouragement from the FSA and any remortgage is likely to be locking a higher margin for the lender than the product that it replaces. We have already seen, over the last couple of years how supply has not been able to meet demand. Total number of mortgage products available in the markets is today less than 15% of the number that were available in the peak of the markets and there are none for the credit impaired market. Interest rates have never been a subtle tool as they treat the UK as a homogenous economic unit when in fact what it feels like in London is not how it may feel in Nottingham. Nevertheless, millions would be affected by a rise in interest rates and so whatever fiscal measures are adopted, monetary policy will still play its part.