Lenders across the UK are looking for new business and fixed rate mortgages have continued to fall. For buyers, there may be a little flexibility around but for borrowers who are looking to remortgage, it may be a good idea to wait.
We take a look at some of the factors that influence mortgage pricing and how you can recognise signs that rates are about to rise.
Factors that affect mortgage rates
The pricing of mortgages is largely dependent on the ability of banks to access cheap money to lend out. They often get the cheap money by borrowing from other banks, or from a collection of savers.
Lenders borrow on money markets, buying money at a specific rate known as the swap rate, over a certain period of time. Swap rates generally move in line with gilt yields. The gilt yields reflect the expectations of future interest rates, as well as inflation.
Shorter fixed rates are aligned closely to the market view of inflation. Gilt yields and swap rates remain low when inflation is expected to remain low. This, in turn, keeps mortgage rates down. According to CBonline, “When inflation rises, on the other hand, mortgage rates will follow making remortgaging a bit more costly; or a lot more with sharp rises.
To get a more reflective expectation for Bank Rate, the long-term fixes offer the best picture. If lenders expect interest rates to rise, longer-term fixed rates will rise.
Variable rate mortgages on the other hand show a reflection of expectations for Bank Rate and how cheaply lenders can gain access to money from worldwide savers and investors. They can offer more competitive deals to the borrowing public by paying lower rates to savers.
What are the latest signs?
Swap rates are very much lower than they were last month but they have moved up a little over the past fortnight. Between October 1 and October 31st, two-year swaps fell from 1.20 to 1.08. Five year swaps fell from 1.91 to 1.76 in that time, while 10-year swaps fell from 2.41 to 2.29.
The figures are due to a sharp decline in inflation which dropped from 1.5pc in August to 1.2pc in September. There is no official word yet on the October inflation numbers. In the summer, experts predicted a rate rise by the end of this year. The markets, however, suggest that the first increase may not be seen till August next year.
The BOE is not expected to increase the Bank Rate anytime soon as a result of low inflation, and the expected rise in pay over the coming months. The European economy, however, appears to be worsening and it is still unclear the effects this will have on the economy of the UK.