In the United Kingdom, Property Owners Get a Wake up Call

The recent flood of news coming out of the UK shows that a rising number of property owners are not being realistic with their mortgages or other borrowed money. Several news sites based in the UK have published that interest rates in particular are not being realistically considered by those with mortgages. Recent findings from these news sites have shown that the average homeowner typically considers fixed-rate loans only if the loan is fixed at 3.3%. This may be unrealistic since rates of 2% would have to be acquired before one in six switched to a fixed rate loan from a tracker mortgage.

Some are not familiar with tracker mortgages as they are not common in some regions of the world. In the UK, a tracker mortgage is similar to a variable rate mortgage which has an interest rate that can change from period to period. This makes planning the payback period a bit more difficult than it would with a fixed rate loan. Tracker loans are pinned to the European Central Bank loan rates; thus, they track these rates. This can provide more protection for those who have loans since the rate can be predicted over the course of a normal period of time. In this manner, those with loans may feel better about agreeing to a variable rate loan if the ceiling and floor are more easily predictable.

The Bank of England had set a precedent for cheap credit as it kept key lending rates at just 0.5% over the past two years. In addition, the Bank increased its rates slowly, offering consumers a taste of cheap credit which they thought would continue. The Council of Mortgage Lenders showed that in a recent month there was a 5% drop in the amount of home loans that were approved by the major lenders.

This may become a problem for those who are seeking loans in the UK as a market with unrealistic expectations is a market which is hard to judge and predict. Instead of being flexible with the amount of interest that is acceptable, most consumers in the UK are demanding the same low interest rates they found in the past.

For those who are interested in this story, having a working knowledge of the Bank of England will be very beneficial. The Bank of England is actually the central bank for the entire UK. Its model of governance is what most modern central banks are based on. It is also a very old central bank, having been established in 1694 in order to serve the English government. It is still associated with HM Government.

It was nationalised in 1946 and became a private organization in 1997. From that period on, it was owned solely by the government. It sets monetary policy for the entire United Kingdom and has a monopoly on printing money in England and Wales. This great power given to the Bank of England allows it to control most financial movements in the modern United Kingdom.