Can we expect sub 1% mortgagee deals?

In a changing world one thing is for sure, in terms of interest rates, mortgage borrowers have never had it so good.

Since 2009, the base rate has been below 1% which has meant lower cost borrowing for many; however, ultimately mortgage lenders still need to make a profit so there has always been a margin on top of this.

Broadly, there are two types of mortgages rates – variable where they either directly follow the Bank of England base rate or follow a specific lenders interpretation of it, or fixed, where lenders go to the money markets to obtain a chunk of money at a particular rate, add their margin and pass this onto consumers with a guaranteed monthly cost for a set period. The former types are almost solely influenced by the base rate whereas the latter are based loosely on ‘swap rates’ on which the financial institutions trade, often based on where they think the market might go in two, three, five or ten years.

In recent years, with the base rate fluctuating between 0.5% and 0.75%, it has been common to find many rates on offer to the public below 2% and even 1.5%; some have even offered five year fixed products around this level. But can they go lower? The answer is: possibly. A couple of lenders have offered rates a shade below 1% in the past two years, though these have carried high set up fees and were only available to those with large deposits. Needless to say, these deals sold out very quickly.

The reality is that these margins are very tight for banks and building societies and they could come unstuck if all these borrowers jumped ship as soon as they could to the next low deal. They rely on inertia; that many will stay with them long term and that they’ll make their money up quickly on higher standard variable rates. Using a good mortgage broker can avoid the latter.

So, will we see sub 1% mortgage rates return to the market place? Well, if the base rate is cut from its current 0.75%, this clearly becomes more likely. And with all lenders having new targets to achieve, one suspects the spring of 2020 could bring more into the market as the scramble for – the currently fewer – borrowers’ business ensues. Will they be accessible on lower fees and higher loan to value ratios? Only time will tell.

December 2019