Fixed-rates and tracker mortgages are at record lows, the Council of Mortgage Lenders said, due to a variety of funding sources which have enabled lenders to raise capital at “exceptionally low cost”.
In it’s latest news and views publication, the industry body pointed out that its regulated mortgage survey revealed that last November the average new tracker mortgage rate fell to 1.96 per cent – the first time that it has ever dipped below 2 per cent.
It’s a similar picture for fixed-rate borrowers, with some lenders offering the “lowest long-term” rates the market has ever seen.
Market conditions that have produced low gilt yields – UK 10-year paper falling to a fraction over 1.4 per cent last week – are significant for UK lenders, who obtain funding from a variety of sources.
The CML explained that smaller lenders, who cannot access capital markets, tend to rely on retail funding. Despite the low rates on offer to savers, they are continuing to see large inflows of retail deposits, boosted in particular by last year’s increase in the Isa limit to £15,000.
It is this flow of low-cost funding that is helping lenders keep mortgage rates at historic lows, and while NS&I’s pensioner bonds add some competition in the market, the CML stated that the outlook for retail funding looks set to remain strong.
Meanwhile, larger lenders are enjoying favourable conditions in wholesale funding markets, with pension funds and insurance companies looking positively on the UK financial sector, which translates into demand for domestic bonds and equities.
Lenders have taken advantage of these conditions to raise funding by issuing in a variety of markets, including covered bonds and securitisation.
“Not only have lenders been able to raise funding at an exceptionally low cost but also, by using a variety of funding sources, they have been able to diversify their options to keep costs down across all funding markets,” the CML said.
For the wider UK economy, prospects for growth, expectations for inflation and the availability of funding – both from wholesale and retail markets – continue to impact on the level of domestic interest rates.
The CML suggested that the reassuring news for borrowers is that the outlook is relatively benign, with subdued inflation and gradual growth meaning low interest and mortgage rates are underpinned by a positive macro-economic backdrop.
“Obviously, there may be some bumps in the road, and market volatility could affect funding rates,” the statement added, citing large geo-political risks both in Europe and further afield.
“However, if these bumps can be successfully negotiated, the outlook will be for low mortgage rates to continue.”
peter.walker@ft.com
