In the past, interest and mortgage rates were inextricably linked. The average interest rate since 2000 has been around 5%. The average mortgage rate in comparison has been around 7%, so lenders typically had a 2% margin.
Now, the relationship between rates seems to have waned. What determines the mortgage rate you pay today is still linked to the interest rate, but more importantly is the lenders:-
There is a good article from the BSA explaining what drives their mortgage costs.
From a personal perspective, lenders look at how ‘risky’ you are. The least risky person is someone who has a very safe job, earns lots of money and doesn’t want a big loan either – around 60% loan versus the value of the property.
These people are likely to get the best rates.
Their least favourite person would be someone who had defaulted on lots of payments, worked for themselves or as a contractor in a cut throat industry and wanted to borrow 95%.
It’s not that you’d pay high rates under these circumstances – in today’s market when lenders are still recovering from their self-imposed credit crunch (especially the banks) then you may not get access to funding at all.
Currently the governments/Bank of England interest rate is 0.5%. But when you add in the personal circumstances, this shows how diverse mortgage rates and charges are in today’s market:-
First time buyer rates with repayment 95% LTVs | X5% |
Help to Buy 95% mortgage/government funding on new homes (repayment only) |
X3-3.5% |
Interest only rates for buy to let investors with 75% LTVs | X3-4% |
Buyers with repayment and low LTV of 60% | X2-3% |
Buyers with CCJs up to 80% LTV, big fees | X3-4% |
So rates are varying from around 2% for those who are low risk to 5% for those considered higher risk (sadly and wrongly in my view, first time buyers)
What going to happen?
Great news for those who can afford a low loan to value purchase, but not so great news for those who are looking at buying with a poor credit rating.
However, now many brokers and forecasters are suggesting it’s a good time to lock in rates.
Andrew Montlake from Coreco explains
“No matter how vehement the Bank of England are that interest rates are not going to increase any time soon, the real question is whether the financial markets believe this."
“We have already seen the cost of 5 year mortgages increase recently and for borrowers this means that 2014 looks like it could well be the last time that mortgage rates will be so low and we have already seen a high demand from those looking to fix their mortgage payments."
“What is unclear is not whether rates will rise, but rather the timing and pace of change, especially if economic conditions continue to improve and a sharp increase in some homeowners borrowing costs becomes more of a probability rather than a possibility”.
The forecasts for January following a large fall in unemployment and what appears to be an ever improving economy, suggest interest rates could now start to rise. The question is – when they do, will mortgage rates rise too?
Forecasts for interest rate rises:-
CEBR | XUp to a 1% could be implemented as early as the end of 2014 |
Citi | X0.75% by the end of 2014 |
Nomura | X1% by the end of the year |
Capital Economics | X0.75% in 2015 |
What to do to protect yourself from interest rate rises
Well, I’ve been paying off my mortgage at home, so even if rates go back to ‘normal’ then it won’t cost me anymore than I’m paying now. On an investment mortgage I have, we’ve spent money improving the property’s value and building up a fund to potentially finish the refurbishment and sell at a maximum price.
On a new investment property I’m looking to fix the mortgage to keep it as low as possible so when I buy I can secure good capital growth over the next few years. This will increase our ‘loan to value’ rate so I can keep on the best rates.
Andrew from Coreco recommends
"looking at medium term fixed rates, especially over 5 years, as a means of protecting your monthly payments from future rate rises. Five year fixes are available on a Buy To Let basis from 4.19%, albeit with a 1.25% Arrangement Fee, to 4.99% with just a £995 Arrangement Fee.
On a residential basis you can still obtain 5 year fixes from 2.84% and anything under 3% is likely to leave borrowers with a smug grin on their faces in a couple of years time."
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