If you are a Game of Thrones fan, you will know the phrase “Winter is coming”. Ominous and foreboding, it is the motto of the House of Stark. In Westeros, there can be many years of easy weather but these are always followed by a long, harsh winter. At the start of the series the “long summer” has been going on for nine years, but the signs are that the climate is about to change.
In Britain, Bank of England base rates remained unchanged at 0.5% from March 2009 until August 2016 when they were cut another 0.25%. There hasn’t been a base rate rise since July 2007, ten years ago. These are abnormally low interest rates that have continued for an unprecedented length of time, but at some point, Brexit or no Brexit, rates will start to go up again.
The maesters / economists don’t always get it right
The maesters in the Citadel in Westeros put a lot of effort in trying to tell when the summer will end: “Though the Citadel has long sought to learn the manner by which it may predict the length and change of seasons, all efforts have been confounded.”
Of course if you predict “Winter is Coming” often enough you will be right at some point… which is what watching economists predict the next base rate rise often seems to feel like. The following graph from the Resolution Foundation shows what market expectations of interest rates have been every May, with most years predicting a rise in the next year which didn’t happen:
In 2014 the first rise was expected to be six months ahead, but it never happened, largely because of Eurozone/Greek worries. A year ago the first rises were expected in early to mid 2016 – but uncertainty about the Brexit referendum put these on hold and the out-turn was the recent decrease on 4th August 2016.
The new normal
In Game of Thrones, the longer the summer, the harsher the winter that usually follows, as Mormont says: “I can feel it in these old bones of mine… The cold winds are rising. Summer is at an end, and a winter is coming such as this world has never seen.”
Luckily there is no expectation that this will happen with interest rates. As the red “May-15” line shows on the above chart, interest rate rises are now expected to be less steep than previous expectations. The “old normal” for base rates used to be about 5%. David Miles, was on the Bank of England’s monetary policy committee, has attempted to quantify the various reasons why “the new normal” might be lower, estimating it at between 2.5% and a bit over 3%.
“Summer children” and “mortgage prisoners”
Now 2.5% to 3% might not sound like a lot, especially to anyone old enough to remember mortgage rates in double figures. But PwC warns “a 2% rise in interest rates on total household debt, including mortgages, would leave households needing to find an extra £1,000 a year just to cover the extra cost of interest.” and for two groups it is going to feel uncomfortable or worse:
The first are the over-leveraged. Non-mortgage borrowing rose by 9% in 2014 and is continuing to rise this year. Some of these will be “summer children” – there are many people coming up to 30 who have never experienced an interest rate rise at all. Others may have been overly complacent, taking advantage of this golden era of low interest rates to take more out.
The second group are the “mortgage prisoners”, people who are trapped in their existing mortgage because they don’t meet the new “mortgage affordability” criteria that were introduced last year. They may be self-employed, have interest-only mortgages, have very little equity or have a lot of unsecured debt.
Preparing for winter
Will rates go up in 2018? Who knows. But if it’s your financial future that is at stake, then I wouldn’t care to bet against an increase in interest rates.
The two best ways to protect yourself against rate rises are:
- to pay off debt as quickly a possible. The less debt you have, the easier any rate rises will be to manage. Reducing your credit card and unsecured loan debt will also make it easier to remortgage; and
- to refinance your debt to as low an interest rate as possible. For credit card debt, try to get a 0% balance transfer card and plan to repay the balance by the end of the 0% period. If you have a mortgage, even if you are happy with your current variable rate, look at the cost of the different options to switch to a fixed rate. It may be worth paying a fee and/or a higher rate for a good long-term fix.