Are Low Interest Rates Forcing Borrowers into Taking Large Mortgage Risks?

Extremely low interest rates have meant that millions of high value mortgage borrowers in the UK are currently benefiting from great deals. And, with the Governor of the Bank of England recently indicating that interest rates were set to remain low until at least 2016, cheap mortgage payments are set to continue for the next few years.

However, one expert believes that Britain’s ‘blinkered’ policy on interest rates is forcing borrowers to take dangerous gambles. Dr Ros Altmann, a former Downing Street consultant, said that the Bank of England is driving mortgage borrowers to take ‘too much risk’ by keeping Base Rate at 0.5 per cent. Keep reading to find out more.

Expert believes low interest rates are encouraging borrowers to take risks

Over recent months mortgage and loan rates have fallen to record lows. It is now possible to take out a mortgage on rates under 1.5 per cent while personal loan rates have also fallen sharply to under 5 per cent.

However, Dr Ros Altmann, a former government advisor, believes that low rates are enticing mortgage borrowers into taking risks by snapping up large mortgages at artificially low rates. The expert told the Daily Telegraph that low rates are resulting in people taking on long term debt which they may not be able to afford when interest rates inevitably begin to rise.

The newspaper reports that ‘her fear is that when rates rise, many will be stretched to breaking point in trying to service debts they accumulate now.’

Dr Altmann said: “Ultra low interest rates are distorting the economy now, driving borrowers and savers to take on too much risk. This is what caused the crisis in the first place, when financial markets misunderstood or mis-priced risk and encouraged irresponsible borrowing or lending.

“Until 2008, house prices were boosted by irresponsible lending in the form of ‘Self-cert’, interest-only and 125 per cent mortgages, which helped borrowers pretend they could afford large loans. Everyone believed these loans were not too risky because house prices were rising sharply, the same seems to be happening again.

“This time, borrowers are being lured in with record low mortgage rates instead, but the principle of rising house prices validating the borrowing once again underpins policy. Low rates are unhealthy for the economy as they mislead borrowers by subsidising loans,” she added.

The expert believes that the Bank of England should start to raise interest rates now in order to avoid sharper rates in the future which would have a greater impact on large mortgage borrowers.

She added: “I strongly believe the Monetary Policy Committee (MPC) should start gently easing interest rates up now, giving people a better idea of what they can really afford, rather than the illusion of affordability created by current artificially low rates.”

Islay Robinson, CEO of London mortgage broker Enness Private Clients, said: “Under recent changes to the mortgage lending rules, banks have to prove that large mortgages are affordable to borrowers. Anyone taking out a new mortgage should understand what their payments are now and what they can expect to pay if interest rates were to rise in the future.”

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