Mortgages  

Ready, willing and able

Ready, willing and able

The UK bank rate is now in its sixth year of being held at 0.5 per cent.

Little did the members of the Monetary Policy Committee who set the rate realise it would remain the same for so long. Indeed none of those members are on the committee any longer and six years on, the Bank of England’s role is substantially different too.

But while the bank rate has been static for six years, the same cannot be said of mortgage rates, where fierce competition among lenders has pushed rates down to historic lows.

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The weighted average rate of a new mortgage taken out in the last quarter of 2014 was just 3.17 per cent according to the latest Mortgage Lenders and Administrators statistics from the Bank of England.

Six years ago it was almost twice that at 6.07 per cent. The Funding for Lending Scheme takes some responsibility for this, but so too has the continual moving goalposts on expectation of when the next rise in interest rates will be.

After the last Inflation Report and suggestion from Bank of England governor Mark Carney that the next move could actually be a fall rather than a rise, the markets are not now expecting a rise until the third quarter of 2016.

The other thing affecting quoted mortgage rates, that is less transparent, is the risk profile of lending. Loans with loan-to-value (LTV) ratios over 90 per cent have fallen from more than 15 per cent of loans made at the end of 2007 to less than 5 per cent at the end of 2014.

Furthermore, the percentage of higher-risk loans all round has fallen sharply. The proportion of mortgages over 90 per cent loan-to-value and a loan-to-income (LTI) ratio of 2.75 times joint incomes or 3.5 times a single income has fallen from more than 10 per cent of lending to less than three.

It is not really surprising that there is a bit more appetite for risk now that the economy is improving and in particular that wages are expected to continue to increase in real terms after five years of falls. With a lower risk profile there is more room for lenders to offer lower rates to capture new business and to stimulate the numbers of transactions in the market too.

Low mortgage rates and a bigger appetite for higher-risk lending is great news for people wanting to buy or move house, especially given the extraordinarily low rates for fixed-rate loans too. But the mortgage payment is not the only thing that matters. The overall cost of living also has an important part to play.

Despite some of the lowest mortgage rates on record, falling food and oil prices and some increase in wages, the ability to buy a home at the end of 2014 was still worse than the previous year. The latest Hamptons International Ability to Buy Index reveals that despite falling mortgage rates, food prices and transport costs, ability to buy deteriorated by 2 per cent in 2014.