Downgrade in Britain's credit rating could prove expensive for mortgage holders
Sunday 19 February 2012
Mortgage rates could rise dramatically if Britain loses its prized AAA credit rating, experts are warning.
Last week, UK government debt was put on "negative outlook" by the credit ratings agency Moody's, giving it a 30 per cent chance of a downgrade within the next 18 months.
Such a downgrade could not only hit Britain's prestige, but also the pockets of millions of mortgage holders.
Ray Boulger, the technical director of broker John Charcol, says: "Any downgrade could push up the rate that the Government has to pay in order to borrow, and if this happens then this should filter through to banks' borrowing costs and ultimately what you pay when it comes time to remortgage."
This is despite suggestions by many City analysts that the Bank of England base rate, which is currently at 0.5 per cent, will stay at historic low levels for potentially years to come.
It is also by no means certain that a downgrade will actually push up the government's borrowing costs.
"It's a bit of an anomaly, but since the United States lost its AAA credit rating the cost of its borrowing instead of going up has actually fallen 50 basis points," Mr Boulger says.
David Black, a banking analyst at the financial information provider Defaqto, is urging consumers to take steps now to protect themselves.
"No one is certain as to what will happen with the credit rating and how this could impact personal finances; so try and pay off expensive debt, review your existing arrangements, and if you have a reasonable level of savings and a mortgage and are a higher-rate tax payer, look at the possibility of an offset mortgage," he says.
But it's not just mortgage rates that consumers would have to worry about if there was ultimately a downgrade of Britain's credit rating.
"Any increase in government borrowing costs or the pressure of a potential downgrade is likely to lead to higher personal taxes," Mr Black says.
"After all, the Government will need to fill its black hole and crucially show foreign investors that it is serious about getting the deficit down."
There could, though, be better news for people looking to convert their pension pots into an annuity – an income for life – from a UK downgrade.
It could potentially reverse some of the damage wrought to annuities by the Bank of England's programme of quantitative easing (QE).
"It's been pretty much bad news for annuity savers for the past few years, made worse by QE," says Tom McPhail, Hargreaves Lansdown's head of pensions research.
"If government borrowing costs did rise again, then on the surface it's likely that annuity rates will all also increase, meaning finally people will be getting more for their pension pot."
However, a severe deterioration of the UK Government's credit position could have the opposite effect.
Mr McPhail warns: "If things get really bad, pension funds could be forced to move away from UK gilts altogether into even lower-yielding – but safer – investments, which could mean rates continue to fall long term."
Meanwhile, many interest-only borrowers are facing a nervous wait to see if they will be allowed to remortgage or even stay on their existing deals.
Lloyds customers have been told they will have to provide proof they have an investment vehicle in place capable of repaying the capital on their mortgage.
"Outside of the long-term, fixed-rate mortgage market, things are tightening up and getting more expensive for mortgage borrowers," Mr Boulger says.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Emergency call 'started off dumb, but got pretty serious'
Britain First criticised for using actress's memory to draw attention to their 'hate-filled home page'
Thought you'd seen it all after the Jeremy Paxman interview?
Greatest mystery about the hit BBC1 show is how it continues to be made at all, writes Grace Dent
"History is violent," says the US Army tank commander Don "Wardaddy" Collier
Argentinian scored 'rabona' wonder goal for Tottenham in Europa League – see it here
Mark Dampier: Woodford’s young companies could be the stars of the future
10 tips for taking out a personal loan
You'll need £220,000 for a minimum wage in your retirement
Questions of Cash: Something rotten in the cellar causes trouble up above
Weekly Money: round-up of the personal finance stories you may have missed 20-24 October
- 1 This 'woman calls police to order pizza' story isn't going where you're expecting
- 2 Watch what happened when food critics were unknowingly served McDonald's
- 3 Jimmy Carr's controversial Oscar Pistorius joke goes a bit too far at the Q Awards
- 4 Ottawa shootings: Bruce MacKinnon's cartoon is the perfect tribute to soldier Nathan Cirillo
- 5 Of course, teenage girls need role models – but not like beauty vlogger Zoella
Of course, teenage girls need role models – but not like beauty vlogger Zoella
Cameron is warned 'no possibility' of UK reducing immigration and that bid to bring in quota on migrant workers would be illegal
Support for EU membership 'at highest level since 1991' with most Brits wanting to stay 'in'
Thousands with degenerative conditions classified as 'fit to work in future' – despite no possibility of improvement
Residents should throw a street party and mix with immigrant neighbours, councils told
Attacks on 'Ukip Calypso' show how skewed people’s priorities are
iJobs Money & Business
£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...
£50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...
£100 - 125k: Guru Careers: A CTO / Chief Technology Officer is needed to join ...
Competitive (DOE): Guru Careers: A COO / Chief Operating Officer is needed to ...
Day In a Page
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village