The International Monetary Fund is advising the Bank of England to consider the large number of British homeowners with fixed-rate mortgages when making decisions about interest rates. The IMF suggests not keeping rates high for an extended period.
According to the IMF, many borrowers haven’t felt the sting of rate hikes yet, but tougher policies could lead to reduced spending, a dip in housing prices, and more loan defaults.
The IMF’s global economic forecast highlights that the UK, especially since the decade before the Covid-19 pandemic, has seen a surge in fixed-rate mortgage agreements, one of the highest globally.
From December 2021 to August 2023, the Bank of England’s monetary policy committee increased interest rates 14 times. However, they have maintained the rate at 5.25% since then, even as inflation dropped from 6.7% to 3.4% since the previous summer.
The IMF points out that countries with a high volume of fixed-rate mortgages, like the UK where over 80% of mortgage loans have fixed terms often lasting less than five years, experience a softer blow from interest rate hikes. Around 1.5 million of these types of mortgage plans are expected to end in 2024.
The IMF suggests that while inflation may be nearing targets, over-tightening could pose a greater risk. It warns that persistent high rates may end up burdening those households that have until now been cushioned.
Fixed-rate mortgages, albeit common in numerous countries, usually have short fixation periods. When these rates reset, the effects of monetary policies can intensify, potentially undermining consumer spending, particularly in households with substantial debt.
The IMF reports that before and during the pandemic lockdowns, many households seized the opportunity to lock in low-interest mortgages, which led to the lowest effective mortgage rates in decades and a global surge in housing prices that compounded already high property prices in some regions.
As fixed mortgage rates reset, the IMF speculates that this could make monetary policy more effective, potentially reducing consumer spending more than anticipated.
Additionally, a sudden increase in defaults could lead to financial instability. This is particularly likely in countries with high household debt or lenient borrower bankruptcy laws.
Finally, the IMF advises that housing markets that have greatly inflated during the pandemic are prone to price corrections if interest rates are kept elevated for too long.
https://www.theguardian.com/business/2024/apr/08/imf-bank-of-england-uk-interest-rates-fixed-rate-mortgages