Will a coalition government mean mortgage rate rises?

A hung parliament could mean uncertainty for stock markets and interest rates, but it may not be a disaster for your finances

the bookmaker William Hill this week quoted odds of 4/6 that there will be a hung parliament after next Thursday's election. Spokesman Graham Sharpe said: "Our hung parliament odds are now the shortest offered in the history of political betting. Punters are backing it as though the votes had already been cast and counted."

As election day has neared, the chances of a hung parliament have appeared to increase. Politicians may not welcome the prospect, but how would it affect your finances?

There are fears it could lead to the collapse of sterling and rising interest rates, which would in turn make mortgages more expensive. But that eventuality may have already have been factored into rates, according to Drew Wotherspoon of the broker John Charcol.

"With a hung parliament increasingly looking like a viable outcome in the general election, some of the perceived risk has already filtered through to the money markets, in the form of higher pricing. If there is no clear election winner, it seems probable that Swap rates will increase and this could be by anything up to 0.5 per cent. But with more lenders using savings to fund their mortgage books, they may pull their products and then adopt a wait-and-see approach rather than a straight increase in rates."

It's the uncertainly that a hung parliament could produce that would be the biggest potential problem, says Melanie Bien of Savills Private Finance. "The money markets don't like uncertainty and are likely to react badly if the deficit is not cut. This could push up interest rates, making loans more expensive."

One way to hedge against the uncertainty is to fix, says Bien. "If borrowers are worried, they should consider a fixed rate as this will protect them from rate rises. If you are coming to the end of a mortgage deal in the next few weeks or months, you can book a rate now; when you come to remortgage you can decide whether to take it out or opt for another fix or a tracker, if the threat of rate rises has rescinded."

However anyone doing so should be wary of non-refundable booking fees. A number of lenders, such as Lloyds TSB, charge a small non-refundable fee of £99, while others may insist that you pay the full arrangement fee upfront, which could mean losing hundreds of pounds if you change your mind.

Martin Bamford, of the financial planners Informed Choice, points out that a hung parliament itself is unlikely to have a major impact on personal finances. "It will be the actions taken by a coalition government, assuming one can be formed, that will be make or break," he says. "As long as whoever is in power takes decisive steps to reduce the national debt, the bond markets should respond positively. If there is a delay to these important decisions, or minority parties hold the government to ransom to further their own agenda, this could be disastrous for the markets, exchange rate and personal investors."

Ian Spreadbury, manager of Fidelity's Strategic Bond Fund, says that as long as whoever ends up in power makes moves to reduce debt post-election, it is unlikely to be the disaster for markets that some predict. "In the event of a hung parliament we would have some form of power-sharing involving the Liberal Democrats. Their attitude to tackling the deficit is quite robust and so I don't think it would be disaster for the markets; in fact it is already partly discounted. However, I do think there could be some modest upward pressure on yields to reflect concern that it may be difficult to get a consensus on the tough decisions that would need to be made."

Malcolm Cuthbert, partner at Killik & Co, says the big question is who will be Chancellor of the Exchequer in a coalition government. "We saw in the New Labour government how powerful Gordon Brown was as Chancellor and this could be part of a deal between either the Tories and Liberal Democrats or Labour and the Liberal Democrats.

"In both cases this might well mean that Vince Cable would be Chancellor. If so, he will push through with some of his favourite policies, such as no income tax for those earning less than £10,000 and removing higher rate tax relief on pension contributions." He may also look to re-link the basic state pension to earnings and introduce a "mansion tax" on property valued at over £2m.

But a hung parliament could also mean that the personal finance measures introduced by Labour in their previous Budget statements would be here to stay for some time, says Bamford. "That includes the new highest rate of income tax at 50 per cent and next year's national insurance hike."

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