One of the themes of this blog is that we have seen large official interest-rate cuts followed by efforts such as Quantitative Easing to lower longer-term interest-rates (bond yields) as well. In the UK this was followed by the Funding for (Mortgage) Lending Scheme or FLS which was specifically designed to lower funding costs for banks with the implicit assumption that they would lower mortgage rates in return. A sort of you scratch my back and I will scratch yours between different parts of the UK establishment. As that was politically awkward it was hidden under a smokescreen of promises about lending to smaller businesses. You do not need to take my word about how this went let me show you the latest data on that front.
Within this, loans to small and medium-sized enterprises (SMEs) decreased by £1.0 billion, compared to the average monthly decrease of £0.1 billion over the previous six months. The twelve-month growth rate was -2.1%.
That makes this policy one of history’s biggest failures at least if you believe the official hype.
However the saga had another twist which is that interest rates (for example Denmark now at -0.75%) and bond yields (the ten-year yield of Germany is now 0.35%) placing downwards pressure on UK Gilt yields from international investors looking for yield. And frankly even a very small yield stands out these days! The UK ten-year Gilt yield rose to 3% at the beginning of 2014 as the UK’s economic growth spurt led investors to ask for higher yields and interest-rates to compensate. Now though it is 1.6% and as I shall explain in a moment this has impacted mortgage-rates. If we look for an area where many mortgages are priced which is the two-year yield then we see a rate of 0.41%. This may make you think of the UK’s offer of Pensioner Bonds either side of this term at 2.8% and 4% but I covered savings rates only last week.
However mortgage rates are heavily influenced by this as the Council of Mortgage Lenders explained last week.
The market conditions that have produced such low gilt yields have great significance for UK lenders, who obtain funding from a variety of sources.
Ten-Year Mortgage Rates
This is from Moneyfacts at the end of last week.
first direct has made some significant reductions to its range of fixed rate mortgages, with its 10-year deal securing a cut of 0.60% to earn it the highest Moneyfacts rating…
This deal is now priced at a highly competitive 2.89% – the lowest rate in its sector – fixed for 10 years. It’s available at a loan-to-value of 65% and comes with a fee of £950 per £400,000 borrowed, which is still a very reasonable offering for the long-term sector.
A ten-year offer of 2.89% in the UK with its chequered history on both inflation and interest-rates provides quite a bit to mull in my view. I remember pre credit crunch discussing the best offer back then which was 5.1% and in those circumstances it looked a good deal. Of course the Black Swan later turned up!
A month or so ago we saw this being offered. From Moneysupermarket.
TSB’s new Fix and Flex mortgage will freeze the rate you pay for 10 years but only has early repayment charges for the first five.
Now you need a 40% deposit to get the best rate of 3.44% for new buyers but at these times any option becomes valuable. After all in the shorter to medium term one cannot exclude the possibility that interest-rates will fall further even as we assess that on any longer horizon they are now extremely low. Indeed the deposit point goes further as we are seeing these offers for what you might call prime credit and there is a very unequal market out there once one allows for credit ratings.
Two year fixed mortgage-rates
There are have reductions in this area too and this too let me highlight a deal for a weaker credit rating. From Moneyfacts.
Woolwich from Barclays, which has reduced some (sadly not all) of its fixed rates by up to 0.70%. The most attractive of the reduced offers is the 3.99%, two-year fixed rate deal which allows you to borrow 95% of the house value. This deal, which has no set-up fee, was already a Moneyfacts best buy with a market-leading rate, so this latest reduction just builds on what was already a great offer.
There is some hype around too but the truth is that there is some truth in it.
We certainly have the beginnings of a price war in the fixed rate arena.
Fixed-Rate mortgages are now very important
This is highlighted quite simply by this from the Mortgage Advice Bureau.
Proving to be the minority, just one in ten mortgage applicants opted for the variable rate in December.
This was up from six per cent twelve months ago and is the highest proportion recorded in since November 2012,
I do not think that this has been commented on much as the credit crunch era has seen an extraordinary shift on this front as my recollection of the preceding era was customers chasing variable-rate deals. Indeed it was notable when people from countries like South Africa who I became friends with always insisted they want a fixed-rate mortgage with 7 years or so on their mind. If they will forgive me they stuck out like a sore thumb in the UK then.
Now one in ten people going for a variable-rate mortgage is considered to be a lot.
What is the position now?
The Council of Mortgage Lenders puts it thus.
Last November, the average new tracker mortgage rate fell to 1.96%, according to our regulated mortgage survey – the first time that it has ever dipped below 2%. For fixed-rate borrowers, it’s the same picture, with some lenders offering the lowest long-term rates the market has ever seen.
If we switch to the Bank of England data then we see that its two-year 75% loan to value index peaked at 6.6% in June 2008. This then fell in response to monetary policy easing to 2.92% in September 2011 but then rose to 3.74% in June 2012. We do not have to estimate the panic that this caused in the UK establishment as it only took to the 13 th of July 2012 for the Funding for (Mortgage) Lending Scheme to begin. Of course that had to be hidden by the smokescreen of a claimed boost to business lending. Am I the only person bothered by the fact that this has not only not turned up but things have got worse?
If we return to the impact on mortgage interest rates, then as of the end of 2014 the Bank of England measure was at 2.08% which is the lowest I can find in a series which goes back to 1995 and peaked at 8.38% in February 1995. Of course such information is behind the times so let me quote from Moneyfacts at the end of last week and apologies for the tinge of hype.
But the winners this week have to be those looking for a mortgage, whether first-time buyer, remortgagor or house-hopper; there really are some amazing deals to be had.
We have already had a negative interest-rate in the UK
It often gets forgotten but pre credit crunch the Cheltenham and Gloucester offered a four-year deal at 0.52% below the UK Base Rate. I will leave readers to do the mathematics of what happened when the Base Rate was cut to 0.5%! As it was a four-year term these eventually went away but the UK establishment was in quite a panic. You see they feared that the banking sectors antiquated IT (Information Technology) systems might not be able to cope with a negative interest-rate. As that is the “precious” of these times I have believed that this was a major factor in UK Base Rates not being cut below 0.5%.
There is much to consider in these latest developments on mortgage interest-rates. The phrase all-time low is dangerous as someone in the past centuries may have done a cheaper deal but certainly in modern recorded history they look like that. Let us move onto the implications. First it is yet another boost for the banking-sector as the gains from more business are added to by the way that lower mortgage-rates have boosted their major asset which is house prices. If we carried on with that they would bestride the world again! What could go wrong?
Next we have the impact on UK housing where there is a clear boost again. It is maybe too soon to link it to the Halifax numbers last week but let us recall them.
Annual price growth also picked up, to 8.5% from 7.8% in December,
This will give the UK economy another nudge forwards or delay any slowing. Is it rude to point out that this may impact the election period? As the the “rebalancing” promised by former Bank of England Governor Mervyn King, well it is rebalancing towards one of our achilles heels.
Of course under its MMR (Mortgage Market Review) policy the Bank of England Financial Policy Committee is supposed to be stopping all of this. Remember all the promises about controlling the mortgage market. Mind you there was a clue tucked away in its release.
It is not the FPC’s role to control house prices