The decision by the Bank of England to reduce the interest rate to 0.25% and the possibility of it going even lower, brings to an end the longest period of no change in rates since the War/post-War years of 1937 to 1951. Bank rate was cut from 1% to 0.5% in March 2009, and remained there till it was cut again last week.
The Council of Mortgage Lenders (CML) points out that mortgage rates have fallen significantly over that period. The average mortgage rate over that period has fallen from 3.8% to 2.9%.
It also points out that the bank rate is not the only influence. Funding costs, levels of competition, targeted levels of profitability, and an assessment of current and future market conditions to price appropriately for risk are also relevant factors.
So it also follows that a rate cut does not automatically feed through on a like for like basis to mortgage rates. Future pricing will depend on all the factors above and is a matter for individual lenders.
Around 50% of borrowers are currently on fixed rates and will therefore see no immediate impact on their payments in any case. Of the remaining 4.9 million home owners with a variable rate mortgage, over 1.5 million have a tracker rate mortgage and these borrowers may automatically see a rate reduction depending on their mortgage contract but some will have a lower level below which rates cannot fall.
For new borrowers, mortgage pricing is extremely competitive and set to remain so. However, it is worth noting that the Bank has also been urging borrowers to plan ahead for the prospect of higher rates in the future and the CML said consumers should not assume that just because rates are low now, they will necessarily stay that way for a prolonged period.
Recently, fixed rates have been accounting for about 90% of new lending, and while this is partly because they have been priced attractively, it's also likely to reflect a consumer appetite for certainty about outgoings.
CML director general Paul Smee believes that some hesitation on the part of consumers thinking about buying property is understandable against the backdrop of recent political uncertainty. However, mortgage lenders are well capitalised and resilient and open for business to lend, in line with consumer demand as and when confidence levels bounce back.
‘Since the last change in official rate in March 2009, the average mortgage rate has already fallen from 3.8% to 2.9%. This confirms that bank rate is not the only influence on mortgage pricing; we feel that the mortgage market is at present well capitalised, resilient and open for business. Housing market fundamentals are sound,’ he explained.
‘So, we see the cut as a wider reaction to the economic effects of recent political uncertainty. We note the announcement of the Term Funding Scheme and its potential positive impact on lenders' businesses. We will work with the authorities on the detail,’ he added.
However, Peter Williams, executive director of the Intermediary Mortgage Lenders Association (IMLA), believes that an era of ultra-low rates is here to stay. ‘While some think a rate cut could adversely affect sterling, the Monetary Policy Committee feel there is a clear need to boost spending, borrowing and business investment which they will also hope to achieve through a complimentary asset-purchase programme,’ he said.
‘Lower for longer is good news for consumers, who will reap the benefits of strong mortgage affordability. Borrowers on tracker deals will see a reduction in their monthly payments, and remortgagers will be well-placed to tap into attractive deals,’ he pointed out.
‘While a cut to the Base Rate is unlikely to have an immediate effect on fixed mortgage rates, given that these are priced from the swap curve, it does mean they’re unlikely to increase for a considerable time. Furthermore, borrowers and lenders will also be supported by the newly announced Term Funding Scheme (TFS), which seeks to pass the benefits of a lower Base Rate directly on to consumers,’ he explained.
But he warned that it is not all plain sailing with the Bank signalling that growth is likely to slow and inflation is likely to rise. ‘Alongside the Base Rate cut, this will add extra strain to aspiring buyers struggling to save for a deposit. Borrowers also remain subject to the rigorous affordability checks introduced in the Mortgage Market Review (MMR), which will prevent lenders from advancing significantly more loans to first time buyers’ he said.
‘So the winners will be remortgagers and those on tracker rates, but those most in need, the first time buyers, will continue to find conditions challenging,’ he added.
David Whittaker, managing director of Mortgages for Business, pointed out that mortgage pricing is largely dictated by the cost of borrowing on the inter-bank swap markets, while the current uncertainty around liquidity will mean that some lenders will not want to reduce their rates.
‘Those on tracker mortgages will see a fall in their monthly payments, though many borrowers, particularly buy to let landlords, have already opted for the reliability of similarly priced fixed rate deals,’ said Whittaker.
‘The big unknown is the new Term Funding Scheme, and the more significant question of how this might reform the financial plumbing of the UK in a more radical or unexpected way,’ he added.
He believes that buy to let will remain a solid investment. ‘It seems clear that the general economic outlook has worsened considerably in the wake of the European Union referendum and this raises questions for investors. Returns on savings will weaken, as will bonds and equities and lower yields will only be exacerbated by new monetary stimulus,’ he explained.
‘Meanwhile, the property market’s fundamentals remain strong given the imbalance between supply and demand for homes in the UK and accelerating demand for rental accommodation. This will continue to make buy to let a solid investment for those property investors with the right finance and a carefully thought through business plan,’ he added.
