Predictions for Mortgage Interest Rates
February 6th, 2008 | by admin |The difficulty with predicting mortgage interest rates is that there are 2 things to take into consideration.
- Predictions for the Bank of England’s base Rate
- Predictions for Lenders standard variable rates.
Due to the global credit crunch, mortgage lenders are struggling to gain sufficient finance for mortgage lending. This shortage of funds is pushing up the cost of borrowing. Therefore, lenders are putting up their standard variable rates, independently of the Bank of England’s Base Rate. This is increasing the margin between the base rate and the average mortgage interest rate. You may ask why mortgage lenders need to borrow - surely they can raise funds from savings? This used to be the traditional business model for mortgages. But increasingly, lenders such as Northern Rock took the opportunity to issues more mortgages by borrowing from other institutions.
Forecasts for Bank of England’s Base Rate
In the medium term UK economic growth is likely to slow down, due to:
- falling house prices,
- global slowdown
- Tighter fiscal conditions (government public sector pay restraint and possible need for higher taxes)
- Falling consumer confidence related to stock market and house price falls.
These factors which have a downward impact on growth will reduce inflationary pressures enabling the MPC to cut interest rates. There are some upward cost push inflationary factors, (energy and food prices in particular) but, generally speaking these do not pose a long term threat to inflation.
Despite the scope for cut in interest rates, the MPC is likely to be more conservative than the US federal Reserve. I would predict only small and gradual cuts. A lot depends on how the economy responds to small rate cuts and whether the UK growth slows down more than the government forecast.