Interest Rates – Lower for Longer?

In an important speech from Andrew Haldane, the Chief Economist of the Bank of England stated that “interest rates could remain lower for longer, certainly than I had expected three months ago.”

Citing “weaker global growth, low wage growth and financial and political risks” which could affect the UK economy, these latest comments seem to have ruled out any rise in interest rates until after the election at the very least. In essence, this means that mortgage borrowers are therefore set to continue to enjoy the extraordinarily low rates on offer at present.

There are of course some extraordinary issues spooking everyone at the moment which leads to a whole host of uncertainty; the strength of the global economy, return of Eurozone issues, Russia, Ukraine, the Middle East and Ebola to name but a few. This has led to the FTSE and Dow tanking whilst UK 10 year Gilt Yields have fallen dramatically. Meanwhile, oil battles have pushed prices to unexpected lows.

We have also seen inflation fall further to 1.2% pushing back the expectation of rate rises. UBS for example have pushed back their interest rate rise prediction from November 2014 to August 2015. Consumer confidence in house prices has also fallen to its lowest level for 12 months, according to Halifax.

The discussion now is all about Secular Stagnation!

Given the fact that mortgage lenders are already embroiled in a rate war as they try to increase their business levels in order to meet their annual targets they are already behind on, as well as ensuring a good start to next year, consumers can expect rates to get even keener over the coming few weeks.

With the cost of 5 year money, (SWAP rates), now lower than it has been since August of last year, we have already seen 5 year fixed rates as low as 2.59%. We could well see them drop below the 2.49% level, whilst we could also see discounted variable or tracker rates fall to around the 1% level. Where the low point is remains to be seen, but for anyone looking for security over the next few years where their mortgage payments are concerned, the next few months could well be the best time to lock in for many years.

These low rates are also a blessing for those mortgage prisoners who are unable to remortgage due to new rules introduced in the Mortgage market Review earlier this year.

The Mortgage Market Review introduced new guidelines for lenders which means that they assess a borrowers affordability in a much stricter way. They no longer work on a simple income multiple but now take into account all outgoings, such as loans, school fees, pension contributions and even service charges into account. They also work out affordability based on a stress test; in other words based on a higher interest rate in the future which is around the 6% -7% level.

They have also cut back on interest only and are stricter with older borrowers. For those borrowers who fall into these categories or who have changed the way they are paid, for example recently become self-employed, they can find it difficult to be accepted for a mortgage even if the loan amount is not changing or indeed reducing.

With lenders still seemingly ignoring FCA transitional rules put in place to help these borrowers, low rates will buy them more time until hopefully the mortgage market opens up once more for all borrowers.

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