Preparing for an interest rate hike

Last November, the Bank of England increased the interest rate from a record low 0.25% to 0.5% – the first rate rise in more than a decade. Since then, there has been mounting speculation of a further rate rise in 2018, with some touting as early as June. The governor of the Bank of England responded to these claims last week, stating that an interest rate rise was not a forgone conclusion but something that would be considered following a careful review of current economic indicators. The reason for this sudden hesitation is in part a reaction to slowing inflation, coupled with growing uncertainty surrounding Brexit negotiations.

While the Bank’s final decision will not be announced until 10 May, a potential rise to 0.75% will not have a sizeable impact on those currently paying off a loan from a mainstream lender. Of the 9.2 million households with a mortgage, approximately half are on a standard variable or tracker rate mortgage. Nonetheless, for those already paying high mortgage repayments, the rate of defaulting or missing a payment invariably increases as a consequence of an interest rate hike. Moreover, a rate rise will also influence the criteria underlying risk and mortgage affordability assessments, making it more challenging for some people to be approved for loans from mainstream lenders such as high street banks.

Fortunately, for those who fail to secure credit through traditional avenues, there are many other options. Alternative finance solutions such as bridging finance have become popular for those seeking short-term access to capital by leveraging an existing asset as security. A recent survey by the Association of Short Term Lenders (ASTL) found that 78% of its members – UK bridging lenders – expect their turnover to grow in 2018, while a significant majority have confidence in the future growth prospects of the sector as a whole. For existing homeowners stuck in a delayed property chain, property investors keen to expand their portfolio, or entrepreneurs in need of capital to close a lucrative business opportunity quickly, bridging finance can provide the tailored solutions required.

With interest rates expected to rise sometime over the next year, now is an important time to understand how alternative finance such as bridging can be used as part of a responsive investment strategy. To ensure our clients are aware of the most relevant services and products, Market Financial Solutions (MFS) will soon be releasing a bridging matrix showcasing when specialist loans can be used.

 

To find out more, be sure to speak to one of our experienced underwriters today.

 

 

 

 

 

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