You can find some very interesting deals in the mortgage market at present. Some lenders’ five-year fixed rates got close to the 2% mark, while two-year fixes are available for under 1.5% in many places. If you are looking to buy a home or remortgage, there are big questions to ask and hard decisions to make. Let’s look at the current situation and possible outlook.
Why Mortgage Rates Are Low
Mortgage rates tend to move in line with the general interest rate level in the economy and are primarily affected by the banks’ cost of financing (besides other factors like the regulatory environment or the bank’s willingness to take risks). It starts with the Bank of England’s Bank Rate, but goes far beyond that. After all, the Bank Rate has been unchanged at 0.50% since March 2009 (see history here), while mortgage rates have fluctuated.
Rather than to the Bank Rate itself, mortgage rates are more closely related to interest rates on the interbank market, particularly Libor and swap rates. Both of these are greatly influenced by the Bank Rate themselves, but particularly the latter also reflect expectations regarding the future direction of interest rates. These expectations have been the key factor behind the recent decrease in mortgage rates.
Interest Rate Outlook
Following the financial crisis of 2007-2009, central banks in all the major developed countries have kept their policy rates at record low levels (and also employed some rather unconventional and aggressive monetary policy measures), in order to help the financial sector and stimulate the economy. As the situation has stabilised in the recent years, the key question the markets have been asking is when the BoE will start to raise the rates again.
News and macroeconomic data showing strength of the economy (or higher risk of inflation) tend to make the markets expect a faster increase in interest rates. In the last few months, the opposite has prevailed. Slowing growth in the global economy and the UK, low inflation, low oil prices and ongoing political problems, plus a variety of other issues, have pushed the expected timing of interest rate increase further into the future. A significant portion of financial analysts now believe the next move in BoE’s Bank Rate can actually be down, rather that up, which Governor Mark Carney has also recently confirmed (while dismissing the possibility of negative rates).
Making a Mortgage Decision
Were interest rates to fall further, it could make sense to wait a bit, or to get a more flexible mortgage deal, such as a tracker. However, besides possible savings you must also consider the risks of such tactics. Further decline in interest rates is far from guaranteed. At current levels, the potential for mortgage rate moves is much greater on the upside than on the downside. If you wait and rates end up rising, the cheap options will be gone. Therefore the possibility to lock down a rate near 2% for five years can be quite attractive. Like in investing, catching the exact bottom is impossible, unless you are extremely lucky. Grabbing a good deal while it’s available can make more sense.
Look beyond the Rates
As exciting as the rates may look, they only tell part of the story. The lowest rates you see advertised typically apply to mortgages with require a higher (30-40%) deposit and also tend to come with higher setup fees (often in excess of £1,000). Therefore they are best for those buying bigger, more expensive properties and able to cover a considerable portion of the cost upfront.
If you need a higher LTV deal, you will have to accept a higher interest rate. If you want to borrow a smaller amount, you might find a deal with slightly higher rate, but lower fees, actually cheaper overall. Let’s also not forget the various valuation and legal fees, which almost always apply.
Not least, your personal situation and plans must also be considered. For instance, if you know you might move home in the near future, flexibility and portability will be a key factor. The interest rate is obviously very important, but still only one of the variables when choosing a mortgage deal.