Around half of existing mortgage holders and 90 per cent of new mortgage borrowers will not initially be affected by rising rates, as they’re on fixes, pointed out the Council of Mortgage Lenders in an explanatory note on what underpins interest rates.
While the industry body was quick to say that it is careful not to discuss pricing in a way that could distort competition, it sought to respond to widespread misunderstandings surrounding what underpins changes, especially given the Bank of England’s strongest hints yet that a long awaited rise in the base rate may be coming at the turn of the year.
The CML explained that how higher rates may impact on fixed mortgage customers will depend on what the rate environment looks like and what the prevailing pricing of mortgage products is when existing fixes eventually reach their expiry period.
“With various tranches of business all expiring at different times and reverting from different rates, it is clear that the effect of higher rates on existing fixed-rate mortgage customers will be staggered.
“The instant effect of rate rises will not be felt in the mortgage market universally, in the way that it used to be in the 1980s or early 1990s when most customers had variable rate loans, and felt the effect of any rate change in their next or next-but-one monthly payment.”
Even so, BOE governor Mark Carney said in the same speech that got markets chattering about a rate rise, that:
“Over a half of UK mortgagors would pay higher rates in a year’s time, and close to three-quarters of mortgagors in two years’ time, were interest rates to evolve according to current market rate expectations.”
The CML was keen to stress that the bank rate is not the sole influence, something demonstrated by the fact it has remained static for the past six years, yet mortgage rates have continued to fall. Earlier this year, the CML said that fixed-rates and tracker mortgages are at record lows.
There are of course numerous inter-connecting factors affecting mortgage rates, including the individual lender’s own cost of borrowing funds, the lender’s costs of managing the risks that are inherent in borrowing-to-lend and the riskiness of the lending, amongst other reasons.
Even when they do rise, rates will still look incredibly low by historical standards, commented the CML, with Mr Carney emphasing that a rise will be gradual.