With a cup of tea and a chocolate croissant we sat down to listen to Sam as he gave an overview of the role of the Bank of England and the contents of the Financial Stability Report. As well as setting interest rates, the bank actively monitor and report on risks to the UK economy. You can view the slide presentation at the foot of this blog.
I have to admit that much of the content was possibly more on topic for the investment analysts and discretionary fund managers in the room, but in between "signs of compressed risk premia and increased spreads" there was information of more immediate impact for my clients, especially if you have found it difficult in recent times, to get the mortgage of your dreams.
We are still in an unprecedented period of low interest rates, apparently the lowest for 320 years, I never knew records were kept for so long ! This has led to investors perhaps taking more risk than they need to in the search for yield plus an expansion of credit, both of which were judged to be negative. But the B.O.E doesn't want to put interest rates up by any great amount, as this would impact on household economies, which on average have £200 left at the end of the month, according to their research.
A great deal of work is done by the Bank of England in assessing short term risks to financial stability caused by house price inflation. Although prices in Sam's home of Scotland have only risen by 5%, London has risen on average by 17% in the last year. In order to keep a check on indebtedness the bank has ordered to significant measures:
"When assessing affordability, mortgage lenders should apply an interest rate stress test that assesses whether borrowers could still afford their mortgages if, at any point over the first five years of the loan, Bank Rate were to be 3 percentage points higher than the prevailing rate at origination.
"The Prudential Regulatory Authority and the Financial Conduct Authority should ensure that mortgage lenders do not extend more than 15% of their total number of new residential mortgages at loan to income ratios at or greater than 4.5. This recommendation applies to all lenders which extend residential mortgage lending in excess of £100 million per annum. The recommendation should be implemented as soon as is practicable."
If you add this to the impact that the Mortgage Market review has had on the level of new mortgages being offered, you will appreciate why mortgage borrowing has become more difficult and why you need to have a larger deposit than before. The Bank of England are well aware of "leakage" where borrowers denied a residential mortgage are turning to the buy to lector sector for lending solutions. In view of this they have recommended that the same checks and measures apply to the Buy to Let sector.
Interest rates will inevitably rise and Sam informed us that the likelihood would be frequent small increases in the region of 0.15% beginning in March 2015.
Let's see if it is the case and let's see if regulation of the Buy to Let sector will create a fairer market for first time buyers seeking to make a home and landlords seeking to make an investment.
I don't know whether the focus on investment analysis had rubbed off in anyway but the rest of this week's client work seemed to be more dominated by analysis. There was much work to do on moving clients pension funds onto the open architecture that platforms provide and I am pleased to report that our platform fees are lower than the popular d.i.y. provider based in the west of England. I am also pleased to report that clients with generalist insurance company managed funds can benefit from improved performance with less volatility. More about that in another blog.
My thanks not only to Sheffield Life and Pensions Society for putting on this event but also to Jason Hallam of Investec for agreeing to look at a bunch of share certificates. My client who has enduring power of attorney for his father's financial affairs has become a little overwhelmed with all the paperwork. His father has made some interesting share purchases but alas has lost the capacity to let us know which are current and which have been sold. I look forward to my meeting with Jason.
Click here to access the Bank of England presentation on the Financial Stability report.