Despite recent headlines in national newspapers that are read by your clients, mortgage rates are not determined exclusively by the base rate.
Recent research by Legal & General has shown fixed rates have seen a substantial decrease since 2009, despite the base rate remaining at 0.5 per cent.
Fluctuations in mortgage rates in recent years are the result of external factors and wider economic uncertainty, notes Jeremy Duncombe, director of the Legal & General Mortgage Club.
As a result, Mr Duncombe points out many lenders opted to reduce fixed rates ahead of the Bank of England’s Monetary Policy Committee’s recent decision to cut the base rate to 0.25 per cent.
Mr Duncombe says: “The historic lows we have recently seen in fixed rates highlight the fact that many lenders had already priced a base rate reduction into their products.”
The main factor mortgage experts FTAdviser spoke to agreed impacts how much your clients pay each month for their mortgage is the availability of funding to lenders.
Mortgage pricing is impacted by the rate at which lenders borrow money from depositors.
If property prices are expected to fall in the wake of the UK’s decision to leave the EU, lenders may start to price higher loan-to-value mortgages differently to something that may be considered lower risk Lee TravisWith savings rates already so low, Lee Travis, head of professional development at the Society of Mortgage Professionals, says lenders may struggle to squeeze much more margin from savings rates – especially as savings rates are expected to fall further.
Furthermore, with the Bank of England injecting capital into the market, Mr Travis says lenders are unlikely to increase savings rates so demand for saver deposits will remain low.
Therefore, he says while savings rates could be an influence to mortgage pricing, this factor is unlikely to have a significant impact on the pricing of mortgage rates at this particular time.
Libor rates
Libor rates also have an impact on how much it costs your clients to pay off their mortgage.
Libor is the rate at which banks lend to each other, and is usually a good indication of banks’ confidence in each other.
Changes in the Libor rate usually impact on the pricing of short-term mortgages.
The Society of Mortgage Professionals’ Mr Travis says the Libor rate has been fairly stable since the shock outcome of the European Union membership referendum, which was the nation vote for Brexit.
Mr Travis says the stability of Libor rates at a time when the value of the pound was plummeting and stock markets took a tumble is potentially because of the Bank of England’s quantitative easing measures.
For this reason, while short-term mortgages may become cheaper, Mr Travis says the impact of Libor rates at this time is unlikely to be considerable on how much it costs your clients to pay off their mortgage.
Swap rates
Another factor that influences mortgage pricing is swap rates.
Basically swap rates are contracts that the lenders enter into in order to counter the risk of losing out by lending money on long term fixed rates.
Lenders essentially borrow money from savers and lend it on for a profit.
In order to ensure no losses are incurred by lending this money on a long term fixed rate (the risk being that interest rates could increase more than anticipated on savings rates – thereby reducing the lenders margin), lenders will enter into swap contracts, with parties of the opposite needs.
Following on from the result of the European Union referendum, the Society of Mortgage Professionals’s Mr Travis says swap rates plummeted.
Mr Travis says: “This could be seen as a good indication that longer-term fixed rates are due to get cheaper.”
Aside from funding availability, rates and contracts between the lenders, another thing that dictates the way lenders price their home loans is their risk appetite.
Mr Travis says: “Lenders have their own risk appetites and profitability targets to consider.
“If property prices are expected to fall in the wake of the UK’s decision to leave the EU, lenders may start to price higher loan-to-value mortgages differently to something that may be considered lower risk.”
Ultimately though our experts agreed there is one factor that influences most, if not all, of the above factors when it comes to mortgage pricing.
Inflation was identified as the key factor that shapes mortgage pricing decisions.
The Society of Mortgage Professionals’ Mr Travis points the Bank of England base rate is set by the Monetary Policy Committee (MPC) to enable inflation targets to be met.
Mr Travis says: “While this particular objective seems to have been abandoned somewhat in the wake of the Brexit vote, inflation (which has recently crept up to a 20-month high) could cause rates to go the other way.”
