The rise of the disappearing UK mortgage rate

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%.

Comment

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

 

 

 

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17 thoughts on “The rise of the disappearing UK mortgage rate

  1. Hello Shaun.

    I had to smile

    “It is not the FPC’s role to control house prices ”

    well I thought , what do they control? anything ? apart from thumping great pensions for each other of course …..

    Forbin

    • Hi Forbin

      As to the FPC I sometimes ask groups of financial people if they can name members. If we exclude Mark Carney then the answer is invariably zero which not entirely by chance coincides with their usefulness!

      As to their terms it seems I missed that they got quite a pay rise so 😦 squared!

      “The external
      members of the FPC and the Independent
      Directors of the PRA were paid at the rate of
      £77,520p.a. In February 2014, the Committee
      reviewed, in the light of experience, the time
      commitment involved for the members of
      each of these committees, and decided to
      increase the fees of an FPC external member
      to £90,698p.a., and of an Independent member
      of the PRA Board to £102,326p.a”

      What did they do in return?

  2. Great column, Shaun.
    It is tangential to the thrust of your column, but consumer shifts from variable rate to fixed term mortgages and from one fixed-term length to another should be treated as a price phenomenon in calculating the mortgage interest RPI, but this does not seem to be the case at present. There is really no reason but convenience for calculating a weighted average of different mortgage rate series over time using fixed weights.

    • Hi Andrew

      I take your point which is not one I can recall being made before. You should raise it at the Royal Statistical Society as it has merit. I would say that the data may not be up to it but let’s face it the series is superior to many that we do use! The only catch is when an offer is too good to be true and then ties you in as it may get rather complex….

  3. Hi Shaun,
    Good column as usual.
    In september 2014, we bought our first and only home for our own living. Despite my mortgage broker advising us to go for a 5 year fixed mortgage at 3.19%, we went for a life time tracker mortgage with 1.49% + BoE base rate, working out to 1.99% for now. I bet that they will not raise the interest rates until elections at least. Seems to be working so far ok. May be we will need to fix it nearer the time. Any guess on when you see is a good time to fix our mortgage.

    • Hi FinallyBoughtInUK and welcome to my part of the blogosphere

      Firstly good luck in your new home. As to when the scene is foggy but there are two drivers of higher interest-rates. The simplest right now is to look at the price of oil which dropped like a stone to US $46 or so but has now rebounded to US $58 tonight for the Brent Crude benchmark. This could easily be a technical correction to the drop so we need to watch the next 2/3 weeks here.

      Also we have wage growth which has been weak but should that begin to push higher alongside a rallying oil price then the safety catch will come off the interest-rate trigger.

      • Thanks Shaun. I learnt immensely from your blog posts and the comments here.
        The big risk I am worried about is unforeseen (or black swan) events that force the central banks to raise interest rates. Like it happened in switzerland recently.

  4. Shaun in some respects its good that people are protecting themselves against a step change in interest rates, should they ever arise of course, but should inflation ever get racy again, equally looking less likely, interest rates wont be much use to the central bankers as a short term measure. In the long run these low rates will encourage people to take on ever increasing levels of debt as well as driving house prices ever higher creating a bigger void to those who have and those that don’t.

    • Hi Nickrl,
      …and making it harder for rates to be increased in the long run as bit by bit more and more homeowners take on eye-watering levels of debt. Pretty soon a whole generation of home owners will have only known rock-bottom rates and to an extent based their lives around this. As Shaun has pointed out previously this is a global trend, and to me it looks like it will be hard to reverse.

  5. Hi Shaun,

    An interesting blog around the cost of money and I can’t help but be a contrarian. Surely now that we’ve got folk locked into fixed rate mortgages it is time to exploit them, as you say the majority pay this insurance premium these days so the way the banks can extract more profit is to get hold of large wads of it ever cheaper, the Govt must be planning to give it away, now what was that Grexit planning they were in a meeting about today?

    Your summary is of course right, it is all about secondary effects and look at all those new cars on the road. This financialisation of property is the new way of controlling the economy, why mess about with balancing budgets or repairing the roads, in fact we don’t need to build anything new at all, just tell folk they love old buildings and slap paint on the rotten window frames. With the roads, just white line all the 2 lane approach roads (less tarmac to cover) and use the maintenance savings to pay for cameras to watch and matrix signs to berate the road users for trashing the climate with their selfish journey’s

    All sorted then,

    Paul

    • “This financialisation of property is the new way of controlling the economy” When you say ” the new way” I don’t know if you mean as in the last 7 years or so but I would say it was a trend I first noticed all the way back in the mid 80’s and as such I see nothing new about it.

      • Noo2, Yes you are right it has been going a while but it has become ever more central, take the Q.E. which was touted as liquidity to facillitate lending to business but was actually usd to keep property deals above water for a while longer and to subsidize re-mortgage interest rates. I note how mortgages used to be simple price of money variable rate but now we “sophisticated” fixed rate terms and of course hefty fees as well.

  6. Hi Shaun, I don’t think the FPC were ever interested in controlling House prices so they were telling the truth.

    The purpose of the MMR was to avert over indebtedness on mortgages (because the FPC do indeed expect rates to start rising at some time) in order to protect the bank’s balance sheets and as a by product mortgagees will be protected too. The MMR has no interest or measures related to falling interest rates or rising house prices – only the ability to repay if rates go up.

    That said it’s starting to feel like 2001 – 2007 again…..

  7. There’s no way average mortgage rates will be allowed to exceed 4% within the next 15 years at least. Funding for Lending and Help to Buy will both become permanent in one form or another too, IMO. We all knew this outcome was inevitable – interest rates suppressed and mortgages backed to such an extent that the housing market and house buyers now depend on it.

    • I think that assumes that the authorities always have control; of course this is what they want you to think. But if inflation does get going; the pound plummets – what then? Can the BOE et al really continue with financial repression regardless and “look through” anything; I don’t think so. Like many you imply that the course is set and we will just have to live with it. It isn’t and we may not; things don’t go in straight lines – unfortunately!

  8. The one thing FLS has done is totally decimated interest on savings which millions of elderly totally depend on
    They do not have gold plated company pensions or good annuities instead for many reasons many of which are because their pensions were stolen in company takeovers or their incomes were too low so instead they were prudent and saved only to be royally robbed,insulted and trampled on by Carney and Osbourne

    How dare Osbourne have made promises to help savers its a total sham

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