Mortgage rates in the UK are incredible low at the moment. It is not hard to find 5 year fixed mortgages at just over 2%! That really is an incredible deal. But if you are looking to get a mortgage in the near future, there may be some good news on the horizon. Mortgage rates could go even lower than they are at the moment!
I know, it sounds outrageous to even think that mortgage rates could go even lower. But when you look at the rates in the rest of the developed world, the possibility of rates going even lower becomes a real possibility.
Firstly, you need to understand how mortgage rates are set. Banks and Building societies set mortgage rates based on the UK bond rates (gilt rates). Typically, the U.K. 5-year mortgage rate is (somewhat) based off of the UK 5-year gilt rate. Take this year government rate, which is considered to be the risk free rate, add a bit of interest due to the risk of the borrower and boom, there you have it – a rough approximation at least.
If the banks and building societies really want to play it safe, the can go even further and base their mortgage rates on the 30 year UK government bond rate.
So in essence, the lower the government bond or gilt rate is, the lower the mortgage rate banks and building societies charge to borrowers.
And if you follow the news, you should know exactly what is happening to interest rates around the world. They are being cut. Just on Thursday the European Central Bank (ECB) decided to cut the rate even further! The 30 year government bond rates I just talked about are stupidly low in other countries as seen below:
- UK: 2.34%
- Germany: 1.01% (should go lower due to the move by ECB)
- Japan: 0.71%
- Switzerland: 0.27%
As you can see, the only outlier is the UK. It doesn’t take rocket science to decipher that UK interest rates are higher than most of the developed world. And with UK government offering a higher interest rate, investors who have money in German, Japanese and Swiss bonds will soon wan’t to move their money to the UK as they want a higher return. This flow of money will put downward pressure on UK interest rates. And if the UK gilt rate goes down, so is the possibility of mortgage rates going down as well.
To think about mortgage rates going even lower than they are today is surreal but as seen from the above, it could be a reality. It would be wise to remember that we are living in a world where the markets have been highly distorted and the consequences of this could lead to effects that we have not witnessed before. It would take a brave person to bet against the UK interest rate eventually going negative.