Is the age of rock bottom rates over?

ended 23. June 2022

We  asked brokers if the age of rock-bottom interest rates is finally over (almost all believe it is). Also, as more people lock into longer term fixes, we asked them if borrowers could regret it if rates come back down once inflation is under control to get us out of a potential recession. Their views are below.

11 responses from the Newspage community

We certainly won't see the likes of sub-1% mortgages again. Those days are over unless we have to contend with another emergency like Covid. Even then, I think we've seen that monetary policy magic tricks such as dropping bank rate to 0.1% haven't been healthy for us in the short or long term. A market economy needs a sensible base rate to function effectively; otherwise, it unbalances everything else around it. Trying to predict where rates will be in a month is impossible. Any longer than that is for the birds, although it's possible we could see the norm rise to 4/5%. So the question of how long should I fix my mortgage is never a one-size-fits-all answer. That can only ever be determined by someone's individual circumstances in consultation with a good-quality broker. However, fixing for five years will see out this period of instability and protect people against both rate rises and possible house price dips.
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Anyone fixing for longer than five years right now may well end up regretting it once inflation is bought under control and lenders readjust rates. The exception is if people only have 10 years remaining on their mortgage term and wish to just be done with it with one long fix. The predictions are that inflation should be bought under control by 2024, and if so anyone on a 10-year fix who has possibly arranged it in the past six months may well regret it as the penalties to remortgage won't be cheap. As always, seek professional advice as fixing for a long period right now may not always be best for your personal circumstances.
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Based on the fact many 5-year fixed rates are now lower than a 2-year fixed rate product, there is an argument to say lenders see a short-term squeeze on rates to combat inflation but for rates to then reduce back down to more manageable levels. From a borrower's point of view, it's a balancing act of what is right based on their needs. If rates do come tumbling down, yes some will be kicking themselves for the fact that they are missing out. However, at least they secured a rate at the time that was affordable to them. Many people simply can't take the risk of what might happen in two years as if interest rates do shoot up further, it could lead to huge financial difficulties."
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Assuming inflation does come down and the economy is failing, then rate cuts could be introduced, bringing us back into the 2% territory for medium-term mortgage money. However, we feel the time of super low borrowing rates is over, forever. The cost of fixed money has dramatically increased in the past year. 5-year fixed mortgages were circa 1% a year ago and they are now around 3%. On a £250,000 mortgage, that represents a £417 increase in monthly interest cost. We must remember that the base rate is only 1.25% and this could rise to circa 3% within the next 24 months. Therefore, even if rates do come down at a later stage, will they better today's offering? It is key that borrowers start the remortgage process as early as possible, ideally six months before their rate expires so as not to be faced with the option of a high standard variable rate or higher market rates. It is our opinion that fixed rates will continue to rise and with global issues affecting inflation, Bank of England rate rises will only slow the growth rather than reduce it. Therefore we could see five-year fixed mortgages in the 4% plus range within 6-12 months.
Second guessing mortgage rates is a risky strategy and no one knows where they will be in x years. Lenders have already priced in their predictions before the rate comes to market. The only way to play the game is to assess what is right for your situation at the time. Personally, whilst right for a small percentage of people, I feel 7- and 10-year fixed rates are a bit restrictive and prefer the option of a break after five years. I think the era of low rates is over and believe we are heading towards something more steady in terms of base rate, although it will likely increase further before finding its true settling point.
Rates have risen to combat inflation and this is likely to continue further. To say how much further is conjecture but if you look at rates, historically, we are still well under the average. I believe rates will come down again once inflation is under control so there is an argument not to fix in long term at the moment. Equally, there is a counter argument that we are still not over the worst and it could be many years before the Monetary Policy Committee feels comfortable enough to bring rates back down.
If you're intending to stay put in your property, fixing for 5 or 10 years now still makes a lot of sense. Yes, rates are higher than where they were a year ago, but they're still dirt cheap by historical standards. My best guess is that mortgage rates will settle around the 4-5% mark for the next few years. The days of mega cheap rates are behind us I think, and that's probably a good thing. Current property prices, pumped higher by an overdose of cheap credit, are unsustainable.
Where are rates going is the most common questions people ask brokers. We can never know for sure, but will they go down in the next 12 months? Most likely not. Is fixing for 10 years a good idea? Well it’s down to your appetite for risk, as most long-term fixed rates carry a hefty Early Repayment Charge so if you are considering one make sure you plan on staying in the property for that long as it could be a costly mistake if not.
It is naïve to believe that the current rate rises were seeing are going to reverse and things will return to the levels we have enjoyed for the last decade. It is possible that we will see a period of regular adjustments as central governments try to maintain an economic balancing act whilst we navigate the bumpy journey ahead. There is so much uncertainty that it would take Marty McFly to venture a view on the future. The UK mortgage market has been lacking longer term fixed rates and those that have been offered have generally been poorly subscribed for a whole host of reasons. There is the risk that you could be committing to higher costs than you may otherwise average through shorter term products over a comparable period. However, if you asked the borrowers whose rates are ending now whether they would have opted for a rate marginally higher back when they took their product for another three or five years certainty, I would expect a sizable number would show buyer's remorse. It is a longer term commitment, but, the additional features of portability and permitted over-payments do make the contracts more appealing and flexible. Longer term rates have a place in mortgage advice and if more providers were in the space and rates were more visible the uptake would increase.
Interest rates, or more specifically the mortgage interest rates that you and I pay, are in an odd place at the moment. You see, many lenders aren’t putting up rates just because their funding costs have risen, many are increasing rates because they are too busy. They are literally trying to stop people using them by making themselves more expensive than the competition. The problem is they’re all in the same boat and so retail rates are spiralling upwards. So once the funding cost settles down, i.e. inflation is under control and food and energy supplies are more secure, there may be room for lenders to reduce rates a little IF the housing market has cooled a bit and business volumes return to a more normal level. Don’t expect massive drops back to levels seen over the past two years, however.
Currently I feel like a fortune teller, with the amount of questions I am being asked about what rates are going to do next. If I knew that I would help, but I don't. One client was slightly bemused when I got out my mock crystal ball. I would to see rates stabilise in the near future, as lenders start to cope with the massive influx of people looking to lock into a rate right now. In this industry, there is no "one size fits all" scenario, and everyone's circumstances are different and are treated as such by the lenders. Just because Dave down the pub recommends such and such a mortgage because that is what he got, is not really a guide to your own situation. Please find a reputable broker, ideally one that has a record-breaking beard, so they can assist you.