Low-cost mortgages will soon be a thing of the past, as experts warn that ‘perfect storm’ could push up interest rates
Mortgage rates may be on the cusp of getting more expensive despite unprecedented measures by the Bank of England to keep them low.
Realtors say a “ perfect storm ” of troubles indicates that mortgage rates, which are currently still at historic lows, could soon rise as the coronavirus lockdown is devastating many households’ finances.
At the same time, lenders have become more cautious about who they lend money to.
Mortgage rates remain low, but experts have warned this is about to change
A cocktail of uncertainty about the future of house prices, millions facing layoffs and a huge surge in demand from borrowers seeking loans following the recent stamp duty cut has continued to hold back.
Mortgage broker Private Finance says this could cause banks to increase interest rates to slow down the flow of applications.
But is this alone enough to drive up the cost of buying a home, and what other factors are involved? We look at what determines the mortgage interest rate and whether an imminent increase is likely.
Banks cannot keep up with demand
Banks and financial institutions scrapped a staggering number of deals in the early months of lockdown, mainly due to staff shortages, as most of the country worked from home and a wave of clients called for mortgage vacations.
In fact, when the mortgage vacation was first introduced, many borrowers had to wait on the phone for 10 hours or more before they could talk to anyone.
Lenders will now have more control over their personnel issues, but they still work with a much lower capacity than before and with branches still closed almost everything now has to be done online or by telephone.
Chris Sykes from the Private Finance broker
Lower deposit mortgages usually require more work to insure because they pose a higher risk to the lender.
As a result, if staffing issues at banks and building societies cause deals to be scrapped, these go first.
But lenders can also raise rates if they want to dampen demand.
Broker Private Finance’s Chris Sykes said, “The stamp duty changes have really sparked a tsunami of businesses and lenders and brokers are struggling to meet the demand we are currently seeing.
“Many home buyers have been buying plans for the future for years with the prospect of saving themselves up to £ 15,000 [in stamp duty] are extremely attractive.
‘Employees still work from home and lenders indicate that, unlike many other industries, efficiency is declining.
‘Moreover, in many cases valuers are still on leave or incapacitated for work because of childcare.’
Sykes said it takes an ‘extremely long’ time to process mortgages because of this, adding that lenders are raising rates to manage the flow of applications.
Lenders have canceled a staggering number of mortgage contracts in the first months of the lockdown
Lenders are more risk averse
Another factor that can drive interest rates is a waning appetite for lenders to hire borrowers they see as a greater risk.
And if they generally view lending as riskier in a troubled economy, it could mean interest rates are rising.
This is because banks, counterintuitive as it may seem, charge borrowers they believe are more likely to default than those they consider a safe bet.
This means they can earn more interest to offset the cost of the bad loans that eventually default.
So banks can see a shrinking economy, where job losses are likely a good time to set up mortgage interest rates to cover their backs if households cannot pay their monthly bills and fall into payment arrears.
It’s worth noting that more than two million homeowners are already in this position because they have chosen to take a mortgage vacation – just another way of saying pre-authorized late payment.
Experts argue that lenders are now more relaxed than they were during the initial Covid outbreak, during which time they became extremely cautious.
However, the measures put in place during the lockdown, including tighter credit scores and reluctance to lend to the self-employed, are still in place and are likely to persist for some time.
Swap interest rates have leveled off
Mortgage rates are part of a complex financial web that uses the Bank of England base rate, money market funding costs and competition for savers’ deposits to set their prices.
Traditionally, the cost of fixed-rate mortgages has been heavily influenced by swap rates, which determine the cost of obtaining fixed funding in the money markets for lenders.
Swap rates have varied throughout the year, but seem to have leveled off for the time being
In general, a rise in swap rates will drive up mortgage costs for the lender and therefore the borrower. Due to a fall in swap interest rates, lenders can offer cheaper mortgages.
Although there was a slight rise in swap rates earlier this month, they now appear to have leveled off and remain lower than last year.
How have the rates changed this month?
Data from financial experts at Moneyfacts appears to support Private Finance’s warning about upcoming interest rate hikes.
While rates on the 60 percent low-risk five-year loan-to-value deals haven’t changed since the beginning of the month, some of the riskier deals have crept up.
Both two-year and five-year deals for those with a 20 or 30 percent down payment are up, as have two-year flat rates for those with a 10 percent down payment.
The five-year fixed interest rates at 90 percent loan-to-value fell slightly by 0.03 percent.
Eleanor Williams, financial expert at Moneyfacts, expects interest rates to rise in the coming months: mortgage interest in recent months.
Therefore, those who want to strike a new deal now may want to act quickly.
“The role of an experienced, independent advisor has never been more important in ensuring that borrowers can make an informed choice about the right product.”
It’s also important to keep in mind when looking at average rates across the board that while they may seem low, many of the more expensive mortgages have been pulled from the market in recent months, causing averages to drop, as well as the choice for people with a smaller stake has been reduced.
For example, more than 90 percent of deals for people with a 10 percent down payment have been canceled.
So watch out for average rates because unless broken down into individual loan-to-value levels, they may only reflect the cheaper deals that are still available.
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