Worried about talk of interest rates going up? Don’t panic just yet – let’s put things into perspective…
If you have been keeping an eye on the property market with a view to buying a place of your own at some point in the near future or you are about to remortgage, you may be concerned by talk of interest rates going up. Data from MoneyFacts has shown that interest rates have crept up, but it’s important to put this into perspective. With the Bank of England announcing earlier this month that it would hold its base rate at 0.1 per cent, banks and building societies are unlikely to increase interest rates too drastically in the near future.
According to the website, BuyAssociation average two- and five-year fixed deals for 60 per cent Loan to Value mortgages have risen by 0.09 per cent in July. It’s clearly only a slight uplift and interest rates have been very low recently in any case. The website says that the average rate for a two-year fixed 60 per cent loan to value mortgage is 1.71 per cent – still competitive.
However, the cost of borrowing has been higher for first-time buyers and those with less to spare in the way of a deposit. ‘We have seen an increase to the cost of borrowing for those borrowing with a smaller deposit,’ says MBA’s Sales Manager Phil Leivesley. ‘Someone with a 20 per cent deposit will find that the best two-year fixed rate available currently is the same price they would have paid at the beginning of March with a 10 per cent deposit.’
A higher risk
While this may not sound fair for anyone struggling to get onto the property ladder, there are reasons for this. Lower deposit mortgages can take more work to organise, as they are considered a higher risk to the lender.
In addition, lenders can increase rates if they want to slow demand. And demand for property is currently high. This is for a number of reasons. Firstly, pent-up demand for new properties occurred when the housing market was effectively closed for almost three months during lockdown.
Some people also decided during the confines of lockdown that their current property didn’t meet their needs, concluding they needed a home office or an outdoor space. Then the Chancellor Rishi Sunak boosted the property market deliberately by introducing the Stamp Duty holiday, which increased the ceiling on stamp duty from £125,000 to £500,000 until 31 March 2021. Many prospective buyers have brought forward their plans to buy in order to save them themselves tens of thousands of pounds on stamp duty.
Lenders have also been very busy playing catch-up on their respective workloads since lockdown. Some staff are still on furlough while others are not working due to childcare commitments. ‘Unlike some other sectors, where entire workforces have worked from home with no noticeable impact upon productivity, mortgage lenders have been unable to replicate their pre-COVID capacity,’ says Phil. ‘When you then add unprecedented levels of demand from buyers – demand that has had rocket boosters strapped to it by Rishi Sunak’s Stamp Duty changes – we have a meeting of significantly elevated demand and significantly reduced capacity.
Staving off demand
Phil adds: ‘The only way lenders can manage their capacity is to try to deter higher loan-to-value applications, which place additional demands upon their underwriting and service staff when compared with “less risky” lower Loan to Value lending. We’ve seen lenders withdraw products, which has been pretty well documented, and now we’re seeing an increase in interest rates. This is simply to stave off demand.
If you are not a first-time buyer and you have a sizeable deposit, you are most likely to find that you are still in a strong position. You should still be able to get a good deal on a mortgage product. ‘Those fortunate enough to have larger deposits will see a market that is still extremely well-priced,’ adds Phil. ‘The cost of borrowing for someone with a 25 per cent deposit or greater is almost exactly the same as pre-lockdown.
‘Once demand begins to subside, or lenders can find a way to increase their capacity, or both, we’re likely to see a return to a market that looks broadly to where we left it before COVID-19 arrived on our shores.’
With fewer attractive deals for first-time buyers and those with smaller deposits, it’s advisable to speak to an experienced mortgage broker who can help you make an informed choice about the best mortgage product to suit you.