After 10 years of falling rates, will mortgages stay low?
Homeowners may have viewed Bank of England governor Mark Carney’s recent comments with trepidation. In a speech to the European Central Bank, he said: “Some removal of monetary stimulus is likely to become necessary if the trade-off facing the Monetary Policy Committee continues to lessen and the policy decision accordingly becomes more conventional.” In other words, if economic conditions warrant it, interest rates may have to rise.
This was a slight change in tack from his comments earlier in the month, when he said ‘now was not yet the time’ to start raising rates from their current level (0.25%) as the reality of Brexit negotiations hit the UK economy.
The consensus remains that interest rates won’t rise until 2018 or beyond. Even when they rise, they are only expected to peak at around 2% in five years’ time, before falling off again.
This sounds like good news for homeowners. However, mortgage rates don’t necessarily rise with interest rates. They are usually based on the prevailing 10-year government bond yield. Here there may be more problems. The gilt yield has been at historic lows since the start of this year, but in recent weeks it has started to rise.
It’s risen from just over 1% to 1.3%. This may not sound like much in the scheme of things, but if it goes on long enough, the lowest mortgage rates will be pulled. The last time the gilt yield rose, HSBC was forced to pull its headline-grabbing 0.99%.
For homeowners, the question is what to do next. Should they fix while they still can? For most, it is a balance of risk and reward. Ultimately mortgage rates may go a small amount lower, but homeowners would only be missing out on a relatively small fall in their monthly repayments. On the other hand, if inflation bites, they might go higher. For those that like predictability, fixing might be the right answer in this environment.
See YourMoney.com’s Record low mortgage rates: is it worth paying a penalty to get out of a fix early? for more information.