Mortgages hit all time lows in October, with HSBC leading the way with an initial rate of 0.99% for their variable rate mortgage. Many other lenders followed suit and dropped their rates too.
The cost of borrowing has been falling in unsecured lending as well with credit cards and personal loans becoming cheaper and offering more, but what are the reasons behind this drop and how long is it likely to last?
Why has it become so cheap?
The full story behind falling rates is complicated, but there have been four notable recent events that are likely to be responsible:
- The Bank of England base rate has been at historic lows since 2009, so it is very cheap for banks to borrow money.
- ‘Swap rates’ or the cost of inter-bank lending have fallen in the final quarter of 2014.
- Demand for mortgages also fell, causing lenders to compete over customers with better rates.
- The number of defaults has fallen over the course of the year – meaning it has become less risky to lend.
How long will it last?
It seems these rock bottom rates are unlikely to live long into 2015. Whilst the market costs like swap rates, mortgage demand and the number of defaults are nigh-on impossible to predict, there are two things that seem certain to happen that will drive up mortgage costs:
Base rate rises
Whilst the Bank of England (BoE) has recently been pushing back rate rises later and later, Governor Mark Carney has stated several times that they expect to raise interest rates next year. However, by how much and the exact date is known only to him.
Stricter money reserve rules
The BoE are also expected to raise the amount of money banks need to keep in reserve. Their Financial Policy Committee say:
“This might result in higher lending rates on mortgages in the short term, to the extent that any higher funding costs are passed on to consumers.”
Best fixed rate options
If you want to keep today’s rock bottom mortgage rates it could be a good idea to fix a rate today to keep it for at least two years, whatever happens to the money markets.
The best rates currently available for a 2 year fixed rate mortgage are:
- 1.49% from HSBC if you can afford a 60% Loan to Value (LTV)
- 1.79% from Nationwide for a 75% LTV
- 2.49% from Halifax for a 85% LTV
- 2.99% from Ipswich Building Society for a 90% LTV
If you are want to keep your costs fixed for a decade you can commit to a rate for ten years. Last week Nationwide announced they were making a 10-year fixed-rate mortgage available to anyone who can afford an 85% LTV.
However the rates are higher in anticipation of the likely increases in lending costs, starting at 3.49% for a 70% LTV and up to 4.54% for a 85% LTV. This is a reflection of the rule that the longer you fix for, the higher rates offered tend to be, meaning you can be caught out if rates stay below your fix.
If you don’t want to fix a rate there are other options, from variable rate mortgages to trackers:
Fixed or variable rate mortgages – We help you decide which is better, a fixed or variable rate mortgage
Tracker mortgages – We explain how tracker mortgages work and whether they’re suitable for you