Daily Mail seeks mortgage experts

ended 10. August 2021

A journalist at Thisismoney / Mail Online is writing a piece on how low  mortgage rates can go. It's pegged on the back of the Halifax launching its 0.83% rate the other day, and now HSBC launching its own lowest-ever rate at 0.89%.

She wants to know how low lenders could feasibly go, why rates are so low and what would make banks stop reducing them (just the base rate or other factors? And if they are looking for low-risk business, but when will enough be enough?)

Also interested in what circumstances it might be worth someone paying the early repayment charge on their current mortgage and remortgaging onto one of these super low rates. Could it possibly work out in their favour or would fees always negate it? 

8 responses from the Newspage community

"It seems 'rate wars' are well underway with lenders battling to have the best sub-1% deal. When the market is slightly less active, we will likely see rates fall below 0.8%, as unthinkable as that once may have sounded. "What people need to bear in mind is the lowest headline rate deals aren't always the best deals. Most have a product fee added, which can be up to £1499 if not more, making a 1%+ mortgage product the cheaper option. "We would always recommend you seek advice and don't use the low rate as a bragging right, as that could hit your back pocket hard."
The first thing to say is that fixed rate mortgages aren't directly linked to the BoE base rate. Mainstream lenders are already squeezed on margin, more so than people realise and the likes of Halifax and HSBC find it difficult to make a profit with the BoEBR so low. The rate war is nothing more than lenders wanting to capture market share or win back market share they may have lost to competitors. Lenders have two ways of maintaining their mortgage book; keep people as customers by having great product transfer rates to stop them leaving or get more business in the front end by dropping rates to attract new business - which tends to be more profitable, and they can do this as the money they're lending out is coming to them at around base rate direct from the BoE. There are so many variables that go into this such as the risk mix of the back book, the assumptions that are made about the overall economy and property market over a defined time horizon and trying to balance some of the higher LTV lending they've had their hands forced into with the mortgage guarantee scheme. I suspect we've already hit the bottom trough of low rates because there really is no margin in them; how long they stay there is anyone's guess and if someone tells you they know, they're lying. It may be beneficial to pay the penalties to switch to a lower rate mortgage however this can only ever be established on an individual basis by talking with a good quality mortgage broker and taking all your circumstances into account, there's never a one size fits all despite what some financial TV journolists say.
Banks and building societies are still securing cheap funding through the Bank of England’s Term Funding Scheme to provide their best-ever mortgages. The Bank of England's funding scheme was originally set up for four years, but it has been extended until October this year. It enables the lenders to borrow money at 0.1% in line with the base rate and has freed up billions of pounds for funding. Many of the lenders have a huge amount of cash and rather than keep it on their balance sheets, they want to lend it out while the market is so buoyant. It does not make sense for them to hold on to so much money. The bigger lenders have billions of pounds deposited in Bank of England accounts, and they are receiving a more limited amount of interest. Normally the lenders would invest this cash to get better returns, but investment opportunities are limited at the moment, with many markets being very volatile. With so many lenders consistently improving their pricing to offer super-cheap rates I would not be against a lender offering a 0.5% fix soon. When the cheap funding scheme finishes there is a chance rate will get more expensive if it isn't extended.
As a Mortgage broker firm, my concern is that these low rates are great for the clients on a short term basis, but longer term could prove to be a real issue and a lack of competition. Having sourced mortgages for clients over the last few weeks, the top ten deals are dominated by the Big 6 banks. They are awash with cheap money, however the smaller lenders do not have the same access to cheap money. The mortgage market has become stronger over recent years partly due to its diversity and the number of lenders out there to fit all client niches. A long term rate war will only benefit the lenders with access to cheap funds to the detriment of the smaller lenders and ultimately the consumer. There are many circumstances in which it makes sense to contact a broker to calculate whether switching to one of these low rate deals could ne right for you. Recent estimates are that 46% of homeowners with a mortgage are on their lenders Standard Variable Rate. As these rates are often between 3% and 4%, an hour spent with a broker to research the market for you could be the best hour you spend this year! Even if you are tied into a deal with your lender, asking a broker to analyse the potential cost savings vs the charges for changing lender is worth doing.
If we've learnt one lesson over the past 18 months, it's that we should come to expect the unexpected. Whilst sub 1% rates were unthinkable in the past, the slowdown in the housing market and high internal year end lending targets that banks have will continue to drive interest rates down as the rate war will reach fever pitch over the next 3 - 4 weeks. My prediction is we will see rates fall as low as 0.69% before we see it plateau and eventually start to climb again. Banks can only continue to offer rates at this level, and its noticeable that we still only have a very small handful of lenders offering sub 1% deals. It almost looks like a desperate act from these banks to secure a higher market share, and as they become overwhelmed with applications we will see a return to normality with market leading rates starting above 1%. We've had a number of enquiries from customers who are locked into long term fixed rate products, and depending on the loan size we have been able to save them money even factoring the breakage costs. There are a range of important factors to take into account when breaking a fixed rate contract, such as your current interest rate, length of time your deal has left to run, the size of your ERC and costs associated with arranging the new mortgage to name just a few. Seeking expert advice in this area is vital otherwise you could end up costing yourself thousands extra over the next few years.
I wouldn't be surprised if rates continue to reduce. At this moment in time it is more likely they will go down than increase. These rates are available for people who have a large deposit, it is low risk lending for the banks. With the rates dropping in the last couple of month, it is definitely worth comparing the cost to remortgage. They would need to check the existing early repayment fees as this is a key factor to consider. The larger the mortgage the bigger impact the rate reduction would be. For example, a 1% difference in rate would save you £10,000 in interest per year on a £1m mortgage.
The profit margins have been squeezed so tight that only the biggest mainstream lenders, who lend on volume based models can compete. Whilst these rates are low they are still profitable when lending billions of pounds but they can't get much lower and they will only increase from here. As the profit margins are so tight banks cant afford to lend to high risk applicants who have a higher chance of missed payments or defaults so these products are only available in the lowest loan to value bracket to reduce that risk. It is quite possible that it would make financial sense to pay an early repayment charge to leave your current deal and take advantage of the rates available. There are a few different factors that need to be taken into account such as the cost difference between the two products but also the remaining capital balance at the end of the comparative period. Speak to a fee free broker to make sure the calculations are done correctly before committing.
"Rates can go as low as the banks want them to. It's not always about economics, it is often very much about market share and appetite to risk. "The rates are low because we are still very much living with the damage caused by the credit crunch, which has been layered with a filling of Brexit and topped off with a healthy dollop of pandemic cream. We are many years away from seeing the base rate at 5%+ and arguably many will not see that kind of rate again in their lifetime. "Low risk business is always the lender's preference so those will hefty deposits and good credit profiles can expect to be filling their boots in the months ahead."