The changing mortgage interest rate future

by Alexander Beard, on Oct 6, 2014 2:38:14 PM

1Legal & General’s latest quarterly Mortgage Mood survey has revealed that 68% of homeowners surveyed fear a mortgage rate rise in the next 12 months, but the majority of that group (45%) believe that rates won’t increase by more than 1%. Looking forward two years, over half of the homeowners (52%) feel that rates still won’t increase by more than 2%, with only 12% predicting an increase of 3% over the next 24 months. The research formed part of the quarterly survey run by Legal & General Mortgage Club, which tracks the attitude of homeowners across the UK on a range of mortgage related issues.

The report also revealed that the historically low rates characteristic of today’s mortgage market have distorted homeowners’ perceptions of ‘normal’. A quarter (25%) of those surveyed felt that ‘normal’ interest rates for a mortgage would be between 1.1% and 3%, with the views of the younger generation being particularly skewed. Twenty-six per cent of 18-24’s stated that they felt a ‘normal’ rate would be up to 1%, but no more, with a further quarter (26%) admitting that they don’t know exactly what a normal rate should be.

Jeremy Duncombe, Director at Legal & General Mortgage Club, commented:

“It is encouraging to see that a large proportion of home-owners understand that a rate rise is likely over the next 12 months, and we agree with the overall sentiment that this will probably be under or around 1%. Despite this market awareness, the majority of home-owners are still not actively seeking to remortgage whilst they have the opportunity to take advantage of historically low rates. This can perhaps be explained by the fact that so few people seem to know what a ‘normal’ mortgage interest rate looks like.”

“In the short to medium term, it is likely that rates will go up and the market will return to levels which we have seen previously. Borrowers should be planning now for a rate rise, and have a strategy in place which will enable them to cope with increased mortgage repayments.”

It is somewhat surprising that the Legal & General report indicates that the highest uncertainty about what a ‘normal’ mortgage interest rate might be was highest amongst those over 65, with nearly half of that age group (46%) saying that they don’t know what such a rate would be. Perhaps we should not be surprised if older home-owners, recalling what constituted ‘normal’ mortgage interest rates over thirty years ago, could range upwards into double figures! Maybe we have now evolved a macro-economic environment or fiscal rules that will now prevent mortgage interest rates ever returning to the dizzy heights where ‘normal’ could be 13-14%? Perhaps it is best that those over 65 don’t remember or simply don’t want to voice their fears of a return to the ‘bad old days’!