Today I thought I would reverse things around and look at a consequence of one of 2019’s themes. So let me hand you over to Moneyfacts.
The data shows that the largest rate reduction has been recorded in the five year maximum 80% loan-to-value (LTV) tier, which has fallen by 0.09% to 2.78%, followed by the five year maximum 70% and 85% LTV tiers, which have both decreased by 0.07% to 2.99% and 2.80% respectively. In fact, the only LTV tier to see a rate increase is the two year fixed at a maximum 65% LTV, which has increased by 0.01% to 2.03% from this time last month.
Oh and remember all the rhetoric from politicians after the credit crunch about there being no future for risky mortgage lending?
Since the beginning of this year, our analysis shows that the strongest rate competition appeared to take place at the maximum 95% LTV market, with lenders attempting to attract potential first-time buyers, which are considered the lifeblood of the mortgage and property market. As a result, the two year average fixed rate at this tier was driven down from 3.46% on 1 January to 3.24% by 16 May, where this rate has relatively remained unchanged since.
However those are averages which of course contain more than a few non-competitive offers. If we look further you can borrow at 1.33% from the Post Office for 2 years and at 1,67% from it for five years. These are remortgage rates with 40% equity.
Switching now to the driver of all this let me now point out that the two-year Gilt yield is 0.37% and the five-year is 0.3%. There are two perspectives on this of which the opening one is that the five-year fixed looks a worse deal in a relative comparison. However if we look back we see that it is five-year mortgage rates which have plunged. According to Statista the five-year mortgage rate was some 2% higher in June 2014 ( 3.69%) and apart from a small blip up when Bank Rate was raised to 0.75% has essentially been falling ever since. So five-year fixed rate mortgages are tactically bad but strategically good.
Just for clarity it is not the Gilt yields themselves that directly impact fixed-rate mortgages it is the swap rates that they influence. But with things as they are I expect the downwards pressure to remain.
What about a Bank Rate cut?
I am sure many of you thinking this so let me address it. As we stand UK Gilt yields are expecting two Bank Rate cuts of 0.25% so fixed-rate mortgages are already adjusting to that. Whereas in such a scenario variable-rate mortgages would fall and may well over the next couple of years be a better deal. Of course interest-rates could rise after October 31st should we Brexit on that date but we know that Bank of England Governor Carney cuts interest-rates with the speed of Usain Bolt but raises them at the speed of a tortoise which is hibernating. So only a real calamity would cause the latter. After all this is the world in which we now live.
Danish banks now buckling under the pressure of negative interest rates, with another lender announcing it will impose fees on large retail deposits. ( h/t Tracy Alloway)
Or indeed a world where the benchmark yield in Italy fell below 1% yesterday.
Just for clarity these are my opinions and not advice. Also there is the issue raised by Robert Pearson in the comments section about the banks having higher cost of funds limiting possible mortgage-rate falls.
The Outer Limits
Time for a reminder of something which has ignored the falls in Bank Rate and everything else. The Bank of England quoted interest-rate for credit cards is 20% and has risen in the credit crunch era.
What about the Mortgage Market?
We had figures earlier this week but today the Bank of England offered a wider view.
Net mortgage borrowing by households picked up in July, rising to £4.6 billion. While this was the strongest since March 2016, it reflected a fall in repayments rather than an increase in new lending. The annual growth rate remained at 3.2%, close to the level seen since 2016. Mortgage approvals for house purchase (an indicator for future lending) increased in July to 67,300. This was the strongest since July 2017, but remains within the very narrow range seen over the past two years.
The fall in repayments is curious and amounted to £900 million on a monthly basis and repeats what happened in June. It is dangerous to extrapolate too much from a couple of months but maybe some borrowing is going through this route or at current interest-rates some think it is not worth repaying.
Overall these are better numbers but not as strong as the UK Finance ones from Wednesday.
In spite of the favourable situation provided by falling mortgage rates as we have just looked at and improving real wages house prices are not responding. From the Nationwide.
Annual house price growth remained below 1% for the ninth
month in a row in August, at 0.6%. While house price
growth has remained fairly stable, there have been mixed
signals from the property market in recent months.
In fact the unadjusted price fell by around £1600 on a monthly basis.
The Bank of England slips this headline in for the copy and pasters.
Net consumer credit rose by £0.9 billion in July, broadly in line with the average seen over the past year.
But this represents this.
The annual growth rate of consumer credit remained at 5.5% in July, markedly lower than its peak of 10.9% in November 2016. This slowing reflects the weaker monthly lending flows over most of the past year.
Is there anything else growing at an annual rate of 5.5% in the UK? Perhaps the Bank of England is being wistful for the days when its Sledgehammer QE drove the annual rate of growth up to 10.9%. Also care is needed here about the slowing as much of it may simply reflect a slowing in car loans about which the Bank of England mostly keeps the data to itself ( I have asked).
If we look further ahead ( around 18 months) there was a glimmer of sunlight for the wider economy this morning.
Broad money (M4ex) is a measure of the total amount of money held by households, non-financial businesses (PNFC’s) and financial corporations that do not act to intermediate financial transactions (NIOFCs). In July, total money holdings rose by £18.9 billion, the largest monthly increase since May 2018. The increase on the month was driven by PNFCs, for which money held rose to £5.1 billion following a fall in June
The annual rate of growth is now 3.1% which is the best it has been since this time last year. M4 lending has also been picking up and is now 4.3% so there are some positive signs albeit from low levels.
We live in a curious world because let me add in another factor. The mortgage rates and yields we are discussing today are all strongly negative in real terms when we allow for inflation. Not only are Gilt real yields negative bit the ordinary person can borrow at negative real rates too if they have some equity. Not on a credit card though!
On current trends we may well get very low longer-term fixed-rate mortgages as presumably the ten-year fixed mortgage-rate will start to tumble too. In the uncertainty we face that could look very attractive I think. But again that is simply my opinion and not advice.
As for how low can they go? For the moment a base seems to have formed around the unwillingness/fear of banks on countries with negative interest-rates to actually impose this on the ordinary depositor. But we also know that our central planning overlords have several cunning plans in mind for this.