Gerard Lyons, the Mayor’s Chief Economic Advisor, today called for interest rates to rise to 5 or 6 per cent, rather than the 2.5 per cent that the Governor of the Bank of England has suggested as the level to which rates should return in normal times. With the average house price in London now standing at £492,000, a rate increase of this magnitude would more than double the average London monthly mortgage payment from around £2,000 per month to £4,300 per month.
In response to questioning at today’s City Hall Economy Committee from Andrew Dismore AM, London Assembly member for Barnet and Camden, on what interest rates should return to when the economy returns to strength, Mr Lyons said “I’d sooner be five (or) six (per cent), than two (to) three (per cent)”. (Video link here )
After the Committee hearing Mr Dismore said:
“The Mayor’s Chief Economic Advisor Gerard Lyons is a highly paid and respected individual in the City, so his comments and predictions must be treated very seriously.
“If Mr Lyons had his way and interest rates reached 6 per cent, while this would obviously be good for savers, it would be disastrous for those who have bought homes on variable mortgages at current low rates.
“These comments show just how out of touch are the Mayor and his team. If rates reached six per cent, there would be a serious risk of collapse in property values in London. Thousands of homeowners are barely able to afford their mortgage repayments as it is, because of the excessive cost of a home in the capital. Even moderate rate rises, far less than Mr Lyons predicts, would force many hard working families to default, or face the consequences of negative equity.
“The Government may allege that all is going well with the economic recovery, but it is not reaching ordinary hard working people in their living standards. If a consequence of the recovery is interest rates at these levels, living standards will decline for most people- only the super-rich will benefit as they profit from their investments resulting in such high rates of return.”
- Lenders’ standard variable rate mortgages typically range from around 2% above the base rate (currently set at 0.5%) to 5% above it or even more.
- This produces a range, currently, of 2.5% to 5.5% with a mid-point in this range of 4%.
- 5% rise in the base rate would take the range to between 7% and 10%, with a mid-point of 8.5%.
- The average London home is worth £492,000. If the homeowner had paid a 20% deposit (which is a cautious estimate as many often pay less than 20%), this equates to £98,400, resulting in net mortgage borrowing of £393,600.
- The rate increase would therefore take the average monthly mortgage payment in London from £2,099.59 per month up to £4,327.74 per month. These figures calculated using this mortgage repayment calculator.
· The Resolution Foundation estimates that ‘if rates increase to 5 per cent by 2018…the number of households spending more than one-half of their disposable income on repaying debt could rise from 600,000 today to around 2 million’ and that the ‘the human and social cost of that would be huge’ Whittaker. M (2013), Closer to the edge? Debt repayments in 2018 under different household income and borrowing cost scenarios, The Resolution Foundation, p.3/4