Have low-rate mortgages ‘spoilt’ British borrowers?
A new report says the Bank of England’s long-term, low base rate has led borrowers to develop ‘unrealistic expectations’ of what they should pay for new mortgages. So are we in for a rude awakening when rates rise?
Before I begin, let me say that I don’t feel in any way ‘spoilt’ by the mortgage market – and I’m sure many readers will agree with me. I couldn’t get a mortgage if my life depended on it, thanks to the tightening up of lending criteria since the credit crunch – and London’s persistently high property prices.
What’s more, while the base rate is at an historic low and many lenders’ standard variable mortgage rates (SVRs) look cheap, the reality is that many banks are charging higher margins on their mortgages now than they were before the financial crisis.
The gulf between the fixed rates consumers pay and ‘swap rates’ (the rates at which financial institutions borrow fixed-rate funds from each other) has widened, giving banks the opportunity to make higher profits.
Many borrowers are feeling comfy
Therefore, while some mortgage rates look enticingly low, it isn’t as though banks are ‘spoiling us’. Nevertheless, the current situation is pretty comfortable for some borrowers. Those people with sizeable deposits or equity stakes are able to borrow at reasonable rates.
And elsewhere, some homeowners I know have been overpaying on their mortgages for the best part of two years thanks to a steep drop in their mortgage rates. This will shorten the lifetime of their mortgages, as well as save them money overall.
But all good things must come to an end – and when rates start rising again, mortgages may suddenly become more expensive. This is why the researchers at unbiased.co.uk have warned those who’ve grown used to low mortgage rates to start preparing to pay more.
Are we a ‘spoilt generation’?
According to unbiased, the average rate homeowners would be prepared to fix their mortgages at is 3.3% – with almost one in six saying they would only be happy to fix for three years at a rate of 2% or less.
Worryingly, even the very best fixed-rate mortgage deals on the market currently cost around 3.5% – and no fixed-rate deals have been available at rates as low as 2% since 2005. So it seems homeowners could be in for a short, sharp shock when rates begin to rise – or even before, if they’re looking to tie into a new fixed-rate deal.
Mortgages will increase in line with the base rate, which will inevitably start to climb at some stage. And it’s likely that banks will start to increase the cost of their fixed-rate deals before a jump is announced, in anticipation of the rate rise.
Mortgages are always a gamble
This isn’t to say you should leap into a new fixed-rate mortgage deal now. What’s right for you will depend upon your personal circumstances, and it may make more sense for you to stay on your lender’s standard variable rate (SVR) for the time being – particularly if you can afford to overpay.
Although you should check how much your payments would increase if rates went up by one, two and even three per cent and be aware that some lenders’ SVRs can change at any time, even before the Bank of England changes its base rate.
Deciding on a mortgage deal always involves a gamble. All you can do is what’s best for you based on your current situation, and this may involve getting professional advice as well as using our nifty online mortgage comparison tool.
But one thing is certain, in my view: mortgage rates are unlikely to decrease any further from here. And when the Bank of England starts hiking the base rate again banks will stop passing out the proverbial chocolates to their customers – instead passing on the rate rises instead.
So if you’re feeling spoilt, I’d say it makes sense to enjoy the sensation while it lasts.
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