Homeowners and hopeful home buyers hoping for the high interest rates to take a downward turn as quickly as they rose will be disheartened by the latest report from the International Monetary Fund (IMF). The influential global group reporting on the state of the global economic conditions revealed their forecast for the UK is for higher interest rates to last for five years in the fight against inflation. It should be noted that the report was compiled before the recent revisions to UK growth by the Treasury or the recent declaration of war in Israel.

Out of the G7 economies, which includes the UK, US, Italy, Germany, Canada, France, and Japan, the UK will experience the highest inflation and slowest growth in 2024. The forecast is for 0.6% growth in the UK economy next year.

The IMF reports their forecasts are within 1.5% reliable and they produce updated forecasts every six months. All things remaining the same will likely keep the next forecast within the same expectations, but further economic strains or relief could change the outlook.

The report from IMF blames the need to keep interest rates high on the current inflation issue in the UK. There have been declines in recent months, but the last report of 6.7% inflation is still more than three times the target rate set by the Bank of England at 2.0%.

The report also expects for 2023 to close out with the UK inflation rate being the highest of any G7 economy. 

In an effort to bring inflation closer to target, the Bank of England’s Monetary Policy Committee (MPC) first began raising the standard base interest rate in December 2021. The then base rate was almost zero due to the impact on the economy from the global pandemic. The majority of the MPC voted to hike the rate from 0.1% to 0.25%. That increase was the first of what would be fourteen consecutive meetings in which the rate was raised. 

In September, the MPC voted to keep the 5.25% base rate steady as inflation had declined from 6.8% to 6.7%. The governor of the Bank, Andrew Bailey, was the deciding vote to keep the rate as is and has stated he believes the current rate could be the peak rate. However, there are also warnings that should the MPC need to take further action against inflation, they will not hesitate to increase the base rate again.

The MPC’s action in raising the base rate and therefore the cost of borrowing is to curtail spending. If borrowing is more expensive, then consumers will spend less to absorb the cost of borrowing. This in turn will lower demand and keep prices from rising as supply grows against demand. 

The higher interest rates have had an impact, and it is being seen strongly influencing behavior in the housing market. For months, the average house price has declined in the UK. Recently, the September report from Nationwide revealed a decline in the average house price in all regions of the UK and the fastest decline since 2009.

There is concern for homeowners over continued high interest rates. This year marked two years from a major boom in the housing market when interest rates were still historically low. Home buyers that secured a two-year fixed rate mortgage at the time will have either had their mortgage term end or are approaching the last months before it will expire. 

Coming to the end of a mortgage term means the end of the current deal. Therefore, the historically low offer they secured from their lender is gone. Either the homeowner will remortgage and choose from current interest rate offers or they will be moved to their lender’s standard variable rate (SVR). 

An SVR is normally a higher interest rate than what could be found with a remortgage and rather than allow this move by the lender, experts encourage homeowners to shop for a remortgage. Failing to do so could have the homeowner stuck on the SVR which is subject to increases and paying more than necessary. 

Getting stuck on a SVR and paying more could be a reality for homeowners that fall into negative equity, which is when the property value declines below the amount of debt on the mortgage. Declining property values could be the next warning issued to homeowners as the housing market becomes less active due to higher borrowing costs.

Negative equity will keep a homeowner out of reach of a remortgage. The only way to climb out of the negative equity hole is to pay the amount needed to bring the debt down below the property value. This would likely be hard for homeowners dealing with inflation, higher energy costs due to winter months, and higher interest rates.

Avoiding a SVR should be a priority for homeowners, and shopping for a remortgage is quick and easy to do to determine what deals are available. Shopping with a remortgage broker online could put numerous remortgage quotes in hand to review and compare in a matter of minutes. Going from website to website of remortgage lenders is also an option to gather quotes.

Taking the advice of experts on shopping for a remortgage could now be put into consideration alongside the expectation of the IMF for interest rates to remain high for possibly five years. This could help a homeowner make a choice between a fixed rate deal for only two years or one of five years or longer. It will also be important news for those sitting on the fence while paying on a SVR hoping for rates to be cut before securing a new deal.

The current economic reports may not always make for the most relaxed reading, but staying alert could help homeowners put into place smart strategies to save money rather than paying more than needed. Knowing inflation may be with us for years to come is eye opening for those seeking financial insight for planning ahead. It certainly gives credit to the experts that have suggested shopping for a remortgage sooner rather than later.