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The outlook for mortgage rates: how low can they go?

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12/06/2015
Mortgage rates have been falling since summer 2014. Current Bank of England (BoE) figures indicate that the average two-year fixed rate mortgage is 1.99 per cent, and the average five-year fixed is 2.98 per cent – both represent historic lows. What's the mortgage rate outlook for the year ahead? 

At first glance, it would appear that the only way for mortgage rates to go is up. Aside from occupying record-breaking lows, there are many factors that could serve to push them higher. Inflation is forecast to pick up from zero to reach around two per cent within the next two years, and a Bank of England Base Rate increase is on the cards at some point. Such events will result in mortgage rates being increased – in fact, the cost of borrowing will rise earlier, in anticipation of a hike in Bank Base Rate.

However, experts are split on the question of when rates will increase – and many in the mortgage industry don’t believe it will happen until next year, at the very earliest. “I don’t see the Base Rate changing any time soon,” says Simon Collins, technical manager at mortgage adviser John Charcol.

“The same dynamics that have kept interest rates so low for so long still very much apply. There’s a fairly fragile recovery to support, zero per cent inflation and continuing Eurozone issues. I don’t imagine we’ll see an increase until spring 2016, at least.”

Collins’ views are echoed by Brian Murphy of the Mortgage Advice Bureau. “Every six months for the past five years, there’s been speculation about if and when interest rates will rise,” he records.

“I’ve lost track of how many times we’ve been told it could be weeks or days away. There’s no reason they won’t be maintained at current levels well into next year.”

Gary Festa, mortgage director at HFM Columbus,  doesn’t think a rate rise will happen until this time next year – and even then, rises will be very slow, in tranches of 0.25 per cent.

“This has to be managed very carefully or the housing market will fall hard again which with the exception of London and the South East and certain pockets around the country couldn’t cope with successive base rate rises,” Festa says.

“The economy may be thriving but it is very fragile and the popular press would have a field day, with panic stories recalling when rates were 16 per cent and stories of handing keys in to lenders  – even though that just won’t happen. Mark Carney will have to manage the first increase very carefully and we are a long way from coping with it, it is fine for certain clients with low loan to values to have fixed at 2 per cent for 5 years but first time buyers with 5 or 10 per cent deposits are actually still paying quite high rates, so the question is, would they cope with a large increase? I think it any base rate rises would hit that sector hard.”

As a result, some borrowers may be attracted to tracker rate mortgages, which emulate the Bank of England Base Rate. Trackers are typically cheaper than fixed rate mortgages, and given how far away an interest rate rise seems, they could make for a highly cost effective mortgage for the foreseeable future.

However, if and when rates do rise, repayments will move in step – and the tracker could cease to be such a comparative bargain.

“If you’re considering a tracker mortgage, I’d recommend only taking one that offers a rate cap, or lets you move to another mortgage when rates rise at no extra cost,” advises Collins.

In any event, the bargain mortgages on offer could well be distinct from interest rates in general. At present, the mortgage market is at its most competitive in years – for both Murphy and Collins, this is the key driving force behind today’s great deals.

“Lenders are issuing real crackers, because they want market share in a hurry,” says Collins.

“The Mortgage Market Review (in April 2014) resulted in lending slowing. Now that lenders have got to grips with the new regulations that resulted from the Review, they have some catching up to do.”

Murphy notes that challenger banks and building societies also play a role. “You now have new lenders like TSB contending with the old guard for business, both willing to undercut each other to get it,” he says.

“If this environment lasts, then there are probably few external factors that could jeopardise the deals.”

Lenders battling to outdo each other raises another prospect – rates may not in fact rise at all, but fall yet further.

“Since last summer, people have been saying rates can’t get any lower – but every month, we’ve seen new records,” says Murphy.

“I’m not sure we’ve reached the bottom yet. We could well see average rates below 1 per cent in the near future.”

It would appear that there’s never been a better time to get a mortgage – and this situation will continue, if not improve further, over the next 12 months. However, Collins notes that while the rates on offer may be attractive, their value can be diminished by high fees.

“It may be the case that you could secure a better deal in the long-term by getting a higher rate mortgage, with lower fees,” he advises.

Murphy notes that many of the best rates are only available to those who can pay a sizeable deposit.

“The best deals typically only open up to buyers if they can offer at least 25 per cent upfront – those who can afford a 40 per cent deposit have even more choice,” he says.

 

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