Last week, the IMF said that Interest Rates were Likely to Return To Pre-Pandemic Levels - here’s how this may be beneficial to holders of tracker rate mortgages.
Pre-pandemic, the Bank of England Base Rate (”Base Rate”) were 0.75%, before being cut twice in March 2020 to 0.1% in response to the global pandemic and the UK entering lockdown.
Today they are 4.25% and expected to rise further as the Bank of England attempts to control inflation. The International Monetary Fund (IMF) expects rates to return to lower levels in the coming months, but have not provided a prediction when we might see this happen. There are many factors that can influence long-term interest rates, but in the UK, the main factors affecting the rates include demographic and low productivity growth.
In an ageing population, economic growth is slowed by people saving more and spending less during retirement, which can in turn put pressure on interest rates as central banks try to stimulate borrowing and investment to boost economic growth.
Low productivity creates its own pressure on interest rates as businesses are producing less per unit of labour, which can lead to lower products and reduced investment. In turn, this can limit the demand for borrowing, causing interest rates to fall.
What does this mean for mortgage borrowers?
Interest rates effect the prices that borrowers pay for debt; the higher the interest rate, the more one will pay for one’s mortgage. It may be that there are better deals in the market in the future as interest rates return to their long-term level.
What should I do?
For mortgage borrowers wanting to benefit from falling rates, it may be worth considering a variable rate, or “tracker”, mortgage. With this kind of mortgage the rate falls with interest rates, and could be an opportunity to take advantage of the predicted return to pre-pandemic levels.
In the UK, ‘74 per cent of homeowner mortgages are on a fixed rate contract, with 96 per cent of new borrowers choosing this option since 2019’, say ukfinance.org.uk.
At RAW Mortgages, 98% of our mortgage business is at a variable rate – priced at a margin above the Bank of England Base Rate. This means that the interest payable on a RAW Mortgage falls as the Base Rate falls.
And for those who want some certainty in the short-term, we offer fixed rate periods of up to two years too.
”Over the past 12 months, our customers have been bearing the brunt of the Bank of England’s fight against inflation. While they’re a resilient bunch, we are hopeful that there are better times ahead for non-resident investors in the UK housing market.
We are confident that the UK will continue to provide favourable conditions for a strong housing market and high rates of investment in the UK.” – Tim Parkes, RAW Mortgages Managing Director