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Factors impacting mortgage pricing

This article is part of
Guide to mortgage advice in a low interest rate environment

Factors impacting mortgage pricing

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.

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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. 

With 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.