The Bank of England pushes UK mortgage rates ever lower

The situation concerning interest-rates is in quite a state of change right now. The trend towards negative interest-rates has gathered pace particularly in Japan where this morning Governor Kuroda was reported as saying this in an interview with the Asahi newspaper.

There is plenty of room to cut interest rates further. But achieving negative rates itself is not our primary purpose,

He went on to tell us how they would work.

Kuroda said the decrease in interest rates for housing and other loans has, in fact, been much larger, and the economic impact of that trend is therefore that much greater.

So great in fact that he had to introduce negative interest-rates or “More,More, More”. He also hinted at more QQE ( Qualitative and Quantitative Easing) in spite of this being the state of play.

@RANSquawk: BoJ Governor Kuroda says BoJ balance sheet is at 76% of nominal GDP vs. Fed at 25% and the ECB at 26%

Of course Governor’s Kuroda’s credibility plummeted when he introduced negative interest-rates only a week or so after denying he had any plans to introduce them. These days he is treated like this.

There is a cycle here where Japan eases policy again and this adds to the promised reduction by the European Central Bank in March. This will put quite a bit of pressure on the Bank of England to follow suit especially if the UK continues to see its economic growth fade.

Mark Carney

Yesterday the Bank of England Governor was grilled on his policies by Parliament and told them this according to the Financial Times.

We could cut interest rates towards zero. We could engage in additional asset purchases, including a variety of assets,

You may note that this is now Forward Guidance Mark 14 as the Forward Guidance Mark 13 finds itself on the rubbish heap.

At the BoE’s quarterly inflation report a few weeks ago, Mr Carney told reporters that the next move in rates was “absolutely” more likely to be up than down, adding “the whole MPC stands by that”.

Perhaps we should summarise the Forward Guidance experience like this.

They can fly upside with their feet in the air,
They don’t think of danger, they really don’t care.
Newton would think he had made a mistake,
To see those young men and the chances they take.

Those magnificent men in their flying machines,
they go up tiddly up up,
they go down tiddly down down.

Moving back to specifics Governor Carney has plainly learned nothing from his retreat from telling us the lower bound for UK interest-rates was 0.5% as he now defines it as 0%. This requires an Alice In Wonderland style view of Switzerland, Sweden,Denmark, Japan and the Euro area! Mind you he also seems unaware of the views of someone who sits next to him as Gertjan Vlieghe confirmed my opinion that he could easily vote for a policy easing.

I have to say that I have relatively little tolerance for further downside surprises and should downside surprises continue then I think we will get relatively quickly to a point where I would find it appropriate to respond to it.

According to Governor Carney that means the next move is likely to be up. Perhaps Lewis Carroll was prescient about him.

How puzzling all these changes are! I’m never sure what I’m going to be, from one minute to another.

A Sterling Crisis?

One thing that a Bank of England Governor should not do is talk the UK Pound down. This was either very amateurish or part of a Baron Mervyn King style plan to push it lower under the cover of the Brexit hype. Either way the UK Pound £ dipped into the US $1.39S this morning.

A lot of care is needed here as when it falls the UK Pound £ has a tendency to plummet as it is currently demonstrating. Also the fall is mostly but not entirely against the US Dollar as the fall to 1.27 versus the Euro demonstrates. So looking only at the US Dollar exacerbates the effects but the Governor should remember the World War 2 dictum.

Loose Talk Costs Lives

Lower Mortgage Rates

Bond Yields

The heat is on here as the UK ten-year Gilt yield has fallen to 1.37% this morning. As I note how extraordinarily low this is to someone like me who has followed it since the late 80s I also look to the shorter yields which influence mortgage rates. The five-year yield has dipped to 0.71% which if maintained will lead to cheaper fixed-rate mortgages.

Fixed Rate Mortgages

These have been falling as Yahoo Finance describes.

The average two year fixed-rate mortgage has dropped from 3.09pc a year ago to 2.55pc today according to Moneyfacts, continuing the overall downward trend seen since the end of the financial crisis.

Tucked away in the cheerleading is this if we go to the source Moneyfacts.

For example, the average two-year fixed rate at 90% LTV has fallen from 4.27% two years ago to just 2.99% today, which not only marks an impressive drop in its own right, but is also the first time the average for this sector has ever dipped below 3%. The average two-year fixed rate at 95% LTV has also dramatically fallen, dropping from 5.22% to 4.17% over the same period.

Ah so the loans which post credit crunch were never going to be offered again are not only back but are also seeing government encouragement and lower mortgage rates! I also note that there are issues for the banks doing this as they have a track record of piling in at the top of the market and many of them as I discussed yesterday are still troubled,

Five years ago, there were just 239 mortgages available at 90% or 95% LTV, but this had risen to 671 by this time last year – and availability has increased by 174 in the last 12 months alone, with 845 such products now on offer.

The UK taxpayer of course is the back stop vis a variety of routes. If we look more generally we see that mortgage rates overall are falling to record lows.

The figures show that the average two-year mortgage rate has fallen by 0.02% from January to stand at 2.54%, the lowest rate ever recorded,,,,,,,,, It’s a similar picture in the five-year sector, which saw the average rate fall by the same 0.02% to a new low of 3.25%

If we see more of what we have seen this week then Moneyfacts will be right about this.

Not only are mortgage rates already at record low levels, but there’s the chance for them to fall further still in the months to come.

At this point there will be some wailing and gnashing of teeth from those who followed the first ten or so versions of the Forward Guidance of Mark Carney and remortgaged to avoid higher interest-rates. He led them a sorry dance. However I completely disagree with Moneyfacts about the banks here.

The almost complete absence of risk, at least at wholesale level,

Lodger Mortgages

The last boom saw all sorts of products appear which reflected the use of the word “innovative” in the Irish banking boom and bust. Some have been less kind than me and called them liar loans. Anyway take a look at this from Bath Building Society.

What if you find your ideal home, but your income isn’t quite enough to get the mortgage you need? Well, if the property has a spare bedroom, our Rent a Room Mortgage might be just the answer.  If you rent out a spare bedroom, we will take into account the rental when deciding whether we can offer you the mortgage you need.

Apparently this will let someone borrow £160,000 with an income of £26,000 or a ratio of just over 6! If you look at this maybe you could borrow more than that.

Up to 50% of the loan amount can be covered by the rental income from letting a room in the property.

For the honest there is the risk of void periods – no rental income – for the less honest then there never was any real rental income. What could go wrong?

Comment

Over the past 3 and a half years the policy of the Bank of England has been to push mortgage interest-rates lower. The initial impetus was driven by the Funding for Lending Scheme which has an initial downwards impact of 1% and I note the Bank of England felt it headed towards 2%. This lit a light under the UK housing market which of course is not captured by the official inflation figures so as well as generating some genuine growth it also records what is inflation as economic growth. The law of unintended consequences or perhaps the phrase “be careful what you wish for” has come into play as the international trend to negative interest-rates is pushing them still lower.

Added to this as you can see above we seem to be returning to the era of easier credit which led to the credit crunch itself. All the never again promises have gone out of the window or into the lodgers bedroom. Meanwhile the Bank of England claims it is both “alert” and “vigilant” which we have learned means it is unlikely to be long before the next U-Turn.

12:45 pm update

In an intriguing example of the oddities of probability I received a letter today informing me of this.

All LendInvest loans are secured against a property, providing investors with a fixed net return of 5+% pa*.

In a world of increasingly negative interest-rate many will be tempted after all what can go wrong?

 

 

 

 

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23 thoughts on “The Bank of England pushes UK mortgage rates ever lower

  1. Hi Shaun

    I think this shows, along with much else, that we are inexorably heading towards the next crisis – not a U turn as you mention – and that nothing will prevent it.

    There is no political will for restraint as keeping up house prices has become a major plank of government policy and regulation is, to all intents and purposes, none existent.

    As Carney has officially denied the possibility of negative rates we now know there is a very good chance that they may be tried but I think this is where the Rubicon would be crossed and it not only would not work but would not be accepted by the people and would be regarded as outright wealth confiscation.

    This will end and it will end badly and the authorities will say they never saw it coming.

    However, there are a fair number of canaries in the coal mine at the moment: Brexit; the Euro and the global economic situation generally to name but three. Any one of these could seriously upset the apple cart and I think a crisis is certain in the EU in particular at some time even if we stay and there will be serious economic and political fall out as a result.

    I’m afraid I’m coming to the conclusion that this idiocy is in fact deliberate; setting up a crisis so that it’s easier to ask for sacrifices from the sheep and the sheep will submit.

    • Yes Bob J. you list a few triggers and then there are the unexpected ones. M.Wolf in the FT ws forecasting helicopter money and that has to be a desperate sign. We are accelerating towards an unpredictable resolution. I agree.

  2. The mortgage market has always been rather Alice in Wonderland, where words and figures mean what the parties say they mean.
    The small self employed businessman had difficulty because he found it difficult to produce a number of years accounts showing a consistent income….unsurprisingly, because thats how business goes!
    The employed with three years wage slips was fine….except there is no such thing as a job for life, or probably even twenty five years…..so a total unrealistic parameter. In fact, also a liar loan, except both sides were lying to themselves!
    The real parameter for lending has always been the monthly target of the lending staff, which itself is set by the shareholders profit expectations….which always go up.
    Let’s face it, nobody “in authority” has a clue what they are actually doing….except taking the money and hoping like hell the whole thing doesn’t blow up on their watch.

  3. “The almost complete absence of risk, at least at wholesale level,”

    said the captain of the Titanic ….

    so we’re moving towards the end game of banning banknotes , forcing pensions onto working people who will get -3% p.a. on the money invested , a “tax” on savings of -0.1 >3% and followed up with “one off” bail ins from current accounts and savings accounts of around 10% ( starting).

    QE money printing , mustnt forget that

    to save the liar Banks ……

    And Shaun, will it be enough ?

    Forbin

    • Forbin, I like the scatter-gun of extreme suggestions. Undoubtedly more than one will come true. It is all for the purpose of maintaining the status quo although any of those moves can quite easily be the cause of the upset. I am getting some popcorn.

  4. Hi Shaun

    Great article as always.

    One thing which isn’t taken into account with low mortgage rates, is the other ways in which banks try to gouge you. A lot of mortgage products now cost £1000 – £2500.

    I also see they’re thinking about screwing people who save for a pension. My guess is that they’ll nerf pensions which forces people to move into ISA’s. And then enact a cap on both pension and ISA’s.

    I hope the electorate will rail against this, but I doubt it. It will be sold as a tax on the rich. Not realising that a pension of £1m in forty years time will buy a cup of tea.

    • Indeed, the fees lenders collect on “financial products” were a major driver of lending, and of course tax revenue prior to the Crunch.

    • years ago in a rising market when a single bed starter home cost about 45K (!) and my salary was 15K pa , I had a dreaded 95% LTV , put 2.5K down deposit , but get this , I had to have life cover as provided by the Abbey and then they wanted a £900 “bond” paid up in full for the 1st year in case I could not pay the mortgage if there was a drop in the market …….I think there were arrangement fees as well …..

      by the time completion came these houses were selling for 50K

      such houses are wanted now as despite at the time being considered small and pokey , they are bigger than today’s bathroom as a bed room builds !!

      Forbin

      • I was in a similar situation Forbin only I was on an 80% mortgage and the Building Society wanted a one off payment on a bond/insurance to cover the exact same – which would have required a 20% collapse in prices. The year before prices had increased 10% and during the next 2 years they went up 40%!!! Money for (the Building Society) nothing!!

        It gets better, a friend who had a similar deal a couple of years later as the market neared it’s zenith at that time lost his job and defaulted in the early 90’s as the market crashed. The house was repossessed and sold at 80% of the original loan value. He relied on the “bond” to cover the outstanding but apparently “it didn’t count” according to the Building Society who went on to pursue him for the “insured loss” of 20% of the original value. As I said money for nothing…..

    • HI Anteos and thanks

      As to the fees then there was this in the Daily Telegraph a couple of days ago about a new offer from the Post Office.

      “The bank is offering a 2.24pc three-year fixed where borrowers require 85pc of the property price (85pc “loan-to-value”, or LTV). There is a higher 2.68pc rate for three-year, 90pc LTV loans. ”

      Market leading etc except perhaps as you say for the fees which have edged inexorably higher over time.

      “Both new mortgages come with a £1,495 arrangement fee plus an additional valuation fee.”

  5. Hello Shaun ,

    Seem Minitru has found a Pensions issue

    Thousands told their pension savings could be at risk….

    Unfortunately it misses the point of BIRP/MIRP effect will have !

    When will they wake up? or will it be another Cilla moment?

    looking more like a Panto every day …..

    Forbin

  6. Great article Shaun, as always.
    Forbin,
    I notice sometimes you refer to MIRP , BIRP? Can you please explain what they are? I know zirp and nirp. Thanks.

  7. Great stuff Shaun,
    The masters of the universe seem to capriciously switch between Lewis Carroll and Hans Christian Andersen. They don’t even seem to know which fairy tale they are in.

    I’m reminded of the Brookings Institution discussion with Ben Bernanke (Jan 2104). Here’s the bit:

    MR. BERNANKE: Well, the problem with QE is it works in practice, but it doesn’t work in theory. That’s —
    MR. AHAMED: Yeah, right. (Laughter) And the other way about forward guidance probably.
    MR. BERNANKE: Right

    Here’s the link to the full text:
    http://www.brookings.edu/~/media/events/2014/1/16%20central%20banking%20great%20recession/20140116_bernanke_remarks_transcript.pdf

    I just despair. It has to be an indication of just how much trouble the banks are in. They have struggled to fix the problems; now they are struggling to contain them (again). Worse, when the problems overwhelm us the man on the Clapham omnibus will pay the price; not the man in Threadneedle Street.

    • Hi Eric

      I need to get on the Clapham omnibus again, should I go to Brixton or Stockwell? As to you point I agree that they inhabit another world. Perhaps though when the 2012 emails are finally released we will discover that some had the “Early Wire” into what they planned to do. No wonder Janet Yellen keeps forgetting to give us the details.

  8. Hi Shaun, Thanks another interesting piece, which yet again highlights more alarming developments. One thing that is clear is just how risky buying a home has become. Once again we are encouraged to leverage to the max to get a roof over our heads, and if history is any guide this will push up prices…..again. At the start of the credit crunch I thought it would be the wake up call we needed to get our house in order, but instead we got a lot of hot air and business as usual. I am very glad you are shining a light on this.

    • Hi Zummerzetman and thanks

      Yes there is an irony is there not in bricks and mortar being extremely risky due to the price being so high. They share the latter bit with sovereign and similar bonds which also have highly inflated prices right now. The Titanic is at full speed ahead…

    • Bricks and mortar has always been and still is very risky. Remember the house market crashes of ’74, ’80, ’90, ‘2001 and then of course ’08 – it’s hardly news!

  9. Shaun,

    Although the high LTV and other ‘experimental’ loans you describe are of course high risk and would be incredibly destabilising if a correction occurs, the extent to which this is an issue, I would have thought, is the proportion of total lending that they represent? I would assume the 15% limit imposed by the BOE for lending over 4.5 income is the ceiling?

    This of course leaves BTL and other speculators, which I assume is the part of the market you are most concerned about? I was wondering if you had come across information about the leverage in this sector and the proportion of total lending this represents? Also I remember reading only in Dec-15 that the BOE was set to impose similar limits to this sector too? Or were the tax changes to BTL these said limits?

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