View more on these topics

Opinion: Base rate drop does not mean cheaper mortgages

Williams-Peter-700.jpg

After seven years of a record-low 0.5 per cent base rate, speculation was rife that the Monetary Policy Committee would choose to lower the rate even further in the wake of the referendum.

In the end, the MPC opted to leave the base rate at 0.5 per cent for July – but they have hinted strongly that today’s decision may bring a further reduction, probably to 0.25 per cent, and it is now therefore unlikely that base rate will rise any time soon.

In terms of mortgage rate pricing, lower for longer is generally good news, as this will support continued low rates and therefore affordability.

However, it is important to note that a 0.25 per cent base rate fall would not immediately mean lower mortgage rates; the fixed-rate mortgage deals which are currently popular are priced from the swap curve – meaning lenders have already factored a potential reduction into their pricing. Essentially, the rates many high street customers pay already anticipate this.

There will be some long-term wins. Competition between lenders – which was fierce before the vote – will continue applying downward pressure on rates. Remortgaging will likely increase, as homeowners lock into some of these very attractive rates.

However, lenders will still be required to stress-test borrowers at 3 per cent above prevailing rates to ensure affordability, which will prevent them from advancing significantly more to first-time buyers.

Furthermore, the capital requirements will continue to discourage lenders from servicing first-time buyers with the higher LTV loans they need.

While the outlook for mortgage affordability is good, first-time buyers will therefore continue to struggle with mortgage accessibility, in spite of any rate fall. Meanwhile, increasing inflation and higher rents could further erode their deposit-savings.

Looking further forward, a fall in consumer confidence as a result of the Brexit’s fallout will lower house prices in more pressured areas, and this will benefit some buyers.

However, market fundamentals are unlikely to change soon, and the imbalance between supply and demand means that any fall in prices will bring more buyers back to the market – pushing prices up again.

Peter Williams is executive director of the Intermediary Mortgage Lenders Association

Recommended

RBS-Building-2012-700x450.jpg

Banks warn firms to prepare for negative interest rates

Natwest and Royal Bank of Scotland have written to business customers warning they may have to charge them to hold deposits as a result of low global interest rates. If this happened it would effectively be the first time UK banks had negative interest rates, the BBC reports. The letter, sent to 1.3 million combined […]

Andrew Tyrie Tory conf 2013.jpg

Tyrie calls for post-Brexit reforms to capital rules for new banks

The chairman of the Treasury Select Committee has called for the Government to seize the opportunity to ensure that post-Brexit capital rules are fairer on challenger banks. Conservative MP Andrew Tyrie says that Brexit offers the chance to reshape regulation in a way that gives small and new lenders a better chance of success. His […]

Bank-of-England-Building-BoE-Bus-700x450.jpg

Bank of England defies markets and holds interest rates

The Bank of England has defied market forecasts and kept interest rates on hold at 0.5 per cent. Mark Carney announced the decision, which went against market expectations. Ahead of the announcement markets were pricing in an 80 per cent chance of a rate cut, with many expecting the central bank’s QE programme to resume too. Base rate has not moved since it […]

India rate cut – more to come?

Kunal Desai, Head of Indian Equities at Neptune Investment Management India’s stockmarket rallied this week following news that the central bank was cutting interest rates more aggressively than expected. Commenting on the rate cuts and what this means for India’s economic growth, Kunal Desai notes that there were two important details in the announcement that have […]

Pension savings-2015

Overseas transfer charge

By Jim Grant, Senior Product Insight & Technical Support Analyst, Royal London Transfers to overseas pension schemes are not recognised transfers unless the transfer is to a Qualifying Recognised Overseas Pension Scheme (QROPS). A transfer to an overseas pension scheme that isn’t a QROPS is therefore an unauthorised payment and taxed accordingly. However, even if the […]