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