Fixed-rate mortgages set to fall below 1%
Posted 28 September 2016 by Nick Parkhouse
Leading City analysts believe that fixed-rate mortgages could fall below 1% in 2017 if the Bank of England were to cut the base rate again.
Strong competition between lenders and a further cut to the base rate could give the housing market a boost by making mortgage borrowing cheaper than ever before.
The vote to leave the European Union prompted the Bank of England to cut interest rates to 0.25% in August - the first cut for more than seven years. Economists expect the Bank to cut rates again - to just 0.1% - possibly in November.
Analysts from City-based Bernstein say that a further base rate cut would drive the cost of standard two-year fixed-rate mortgages to 1.1%, and less than 1% for those with a good credit rating.
Mortgages are already at rock-bottom levels, with the Bank of England saying that a typical two-year fixed-rate mortgage at 75% loan-to-value costs just 1.66%.
The analysts say that “the bet is that it gets another 50 basis points [half of 1%] cheaper in 2017”. They calculate that mortgage rates could reach 1.1% by the middle of next year, adding: “If your credit rating is fine, you are probably going to get a cheaper mortgage from either a bank with excess deposits (HSBC, Royal Bank of Scotland) or ones desperate to grow their book – that’s sub 100 basis points (1%).”
Just one lender currently offers a mortgage rate below 1%; HSBCs deal at 0.99% for two years available to 65% loan-to-value.
The Bernstein analysts argue that cheaper mortgage deals will be generated by competition in the mortgage market – traditionally dominated by six players controlling around 75% of lending – and the fact that it is relatively cheap for lenders to attract new customers.
“If you have 20-30% cash and have a good credit profile, we reckon that the day where you will be able to actually bargain out a sub-1% mortgage in this market is not too far off,” says analyst Chirantan Barua. “The most important driver to funding costs in the UK is the Bank of England base rate and the market's future expectations of rate rises as expressed in the yield curve and the swaps market.
"The BoE has cut rates post-Brexit to 25 bps and has signalled their willingness to do so again as a weapon against any post-Brexit recessionary trend.”