Keep it money savvy and understand what impacts mortgage rates
Latest figures show re-mortgaging activity in London has climbed to an 8 year high - a total of £4.2bn was borrowed in Q1 2017 by those looking to remortgage in the capital. As my 2-year fixed mortgage deal comes to end, I too am hunting around for the best deal in the market. This got me thinking, do us millennials really know what impacts mortgage rates? Well, here we go...
Mortgage rates have a substantial impact on the long-term cost of buying a home through financing. We seek the lowest possible rates in order to reduce our monthly outgoings, whilst lenders aim to manage their risk through the interest rates they charge us.
They aren't the only ones, but here are 4 important concepts which all impact mortgage rates:
1. Inflation - Click here for my previous blog post on what inflation actually is and its affects. In short, the general increase in prices means the money we have under our mattress can have less ‘purchasing power’. If inflation is increasing faster than your wages and money are growing, the former is eroding the value of your ££. Why does this affect my mortgage rate? Well, it’s the same story for mortgage lenders and their profits. For example, if your mortgage rate is 4% and inflation currently stands at 2%, then the lender is not making a 4% return from you…infact it’s only 2% - this erodes the value of their returns! Furthermore, let's not forget that any changes in our interest rate (set by the Bank of England aka the BoE) are often used as a tool to manage inflation. As we will see, this can have a direct impact on mortgage rates.
2. Economic growth - Sounds lovely doesn’t it. Actually, that phrase sounds more like a distant memory before the financial crisis! When our economy is booming, everything is gravy. People generally have more money in their pocket, which means they spend more in the high street and as a result this fuels applications for mortgage loans. Here we have the classic case of demand vs supply. As the demand for mortgages outweighs the amount of money providers have in their trunk to lend, mortgage rates tend to increase. As something becomes scarce and more desirable, naturally it's value spikes - think of the avocado price hikes in UK supermarkets this month! As you can imagine, the opposite can happen when an economy is showing signs of sluggish and stalling economic growth.
3. Monetary policy - Sounds scary, but bear with me. When the BoE talks, lenders listen. The BoE don’t actually set the rates in the mortgage market, however, they set what they call the ‘base rate’.
**Jargon free** - this is the official borrowing rate, impacting what borrowers pay for finance and what savers can earn. Notably, changes in the base rate directly impacts mortgage rates.
In August 2016, thousands of Brits had their monthly mortgage payments reduced. This is because the BoE cut the base rate from 0.5% to 0.25% - meaning borrowers who had a tracker mortgage immediately saw a cut in their monthly costs. This is because these types of mortgages are obliged to move in line with the BoE’s base rate. Variable rate mortgages can be impacted by base rate changes, however, any change is actually at the lenders discretion - often there is a delay in lenders passing on such benefits to homeowners. Those on fixed rate mortgages are locked into a mortgage rate for an agreed period of time. However, that doesn’t mean you have to sit and do nothing - do the math as ditching your fix can often prove beneficial. For those financially savvy individuals, bond markets also affect mortgage rates - however, explaining this concept can often provide migraines…
4. The state of the housing market - As you can imagine, trends in the UK housing market directly impact mortgage rates. This goes back to the issue of supply and demand. For example, if millennials are continually shunned out of the UK property market and reinforce the renting trend, it means less homes are being purchased and the demand for mortgages reduces. Even though millennials don’t makeup the entire demographic of UK mortgage applications, this could put downwards pressure on mortgage rates. In London, the average first-time buyer now pays around £385k for their property, whilst their average age has increased to 32. The renting trend might be here to stay!
Ultimately, lenders need to get their paws on cheap cash to provide the average Joe with money for their mortgage . Attractive savings rates lure you in to deposit cash with them and the cost at which they can borrow from the banks all impact how competitive their mortgage rate will be. Let's not forget the trend of online players who are widening their product suite and disrupting the status quo. Before withdrawing the deal due to high demand, Atom Bank released a market leading 5-year fix at a tasty 1.29%. This fell in line with many 2-year fix deals on the market - who ever said rivalry was a bad thing!
We all want the lowest interest rate on our mortgage loan, however, often it’s factors within our control which have the most impact. Things such as your credit score, home price, deposit, loan term and type of mortgage all matters. More often than not, it’s those with higher deposits or solid credit histories which steal the best rates on the market! Even though we only scratched the surface, the above will keep you armed with a fountain of knowledge when chatting to existing or to potential lenders.