At the end of November last year the Bank of England announced that the Funding for Lending Scheme, which has been in operation since late 2012, will be aimed at funding for business, rather than at lending to households. The scheme had been due to end in 2013 but was extended for a further year and has been widely seen as one of the main reasons behind the low interest rate deals available from major banks on their mortgage products (see cbonline for low rates that are still available). While the much heralded economic recovery remains somewhat sluggish there are clear signs that some of the indicators identified by the Bank of England at which the Bank’s interest rate may be raised are certainly developing. The low rates of interest on mortgage deals may not, therefore, be available for much longer; so is now the time to shop around for a fixed rate deal?
The Funding for Lending Effect
Funding for Lending is a scheme that offers banks and building societies access to low cost finance in order to offer lower rate deals to their customers. The focus has been very much on the housing market, seen as crucial to the economic recovery in the UK. Although a housing market boom has not followed the scheme has certainly contributed to a slow and gradual recovery in the sector. With access to cheaper funds the banks have been able to offer mortgage customers much lower rates than would have otherwise been the case. For customers with the lowest loan-to-value (LTV) ratio the most competitive deals have been very attractive indeed, with rates of less than 1.5% accessible for those able to find a forty per cent deposit. Naturally, at this end of the scale a fixed rate deal offers considerable insurance against the potential rise in the base rate in the coming years. At the lowest end of the LTV scale, the 5% deposit end, the same holds true although interest rates hover between 4-5%. Tying into a fixed rate deal for those looking for a 95% mortgage may also be attractive – with this group often representing first time buyers, who may not be in a position to stand potential interest rate hikes in the next two to five years.
What’s Next for Interest Rates?
Some city analysts argue that mortgage rates have already ‘bottomed out’ and that the withdrawal of the Funding for Lending support for the mortgage market will not have an immediate impact. The funding itself ended on 31st December and banks with allowances from the scheme will still have had access to the funds until the end of January. While the scheme itself has been largely responsible for the record low rates in the mortgage market it’s unlikely that its withdrawal will see an overnight rate hike. The Council of Mortgage Lenders (CML) has also noted that the funding market for banks has improved in the last few years, outside of the scheme, so it seems likely that while rates will soon rise, they will do so gradually. However, for those looking to secure themselves into one of the lower rates now may be the time to act. At least one of the Bank of England’s conditions for a possible rise in the base rate seems to be drawing closer, rather sooner than expected.
Shifting Sands for Interest Rates?
The rate of unemployment has been identified as one of the key factors that the Bank’s Monetary Policy Committee (MPC) will take into consideration before a possible rise from the base rate of 0.5%. The figure of 7% unemployed is this trigger (although it’s important to note that this factor alone is only one of a range of factors and that it will only provoke a ‘consideration’ of potential change in the base rate). Unemployment figures show that the rate of unemployment is now running at 7.1%, having reached this level far earlier than originally anticipated. Despite this fact, the latest minutes from the MPC suggest that they are in no rush to do more than consider a rise in the base rate. On balance, with the end of the Funding for Lending Scheme and the clear improvements in the economy, it seems likely that mortgage lending rates are set to rise in the near future, and while the chance to access the best fixed rate deals may well have passed, there are still plenty of opportunities out there.
Nothing is certain in the financial world, as the crash of 2008 well demonstrates. The recovery is still slow but seems to be gathering pace and for those with lower LTV ratios the highly attractive deals available in the 60-80% LTV market may now be at the lowest rates possible. Whether to choose fixed or tracker under the less than certain conditions is a more complex decision, but whichever you choose, the mortgage rates of early 2014 are likely to be the lowest we’ll see for some time.
About the author:
Luke Blake is a freelance writer who specialises in personal finance; in this post he looks at the future for mortgage rates in 2014.