SIMON LAMBERT: It’s a great time to get a mortgage, but are they now so cheap that interest rates will never be able to get back to normal?
If you want a mortgage, now is a great time to get one.
Banks and building societies are more eager to lend than homeowners and buyers are to borrow, while money is cheap and that means rates are super low.
The problem is you can have too much of a good thing. While as an individual you’d be foolish to turn down a cheaper mortgage, the collective cost of this will be felt in years to come – as it impacts our ability to get interest rates anywhere near back towards what used to be considered normal.
Mortgage war: You can get a two-year fix at 1.24% and a five-year at 1.54%
The picture of the average borrower painted by UK Finance statistics, which draw on Britain’s big bank and building societies’ actual lending, shows the typical home mover currently takes out a £229,000 mortgage to buy a £340,800 home.
This is Money’s mortgage finder shows the lowest two-year fixed rate they could get is 1.24 per cent, while a five-year fix is on offer at 1.54 per cent.
Over a 25-year term on a repayment mortgage, the two-year fix would cost £888 a month while the five-year fix costs £920.
The cost of financial security through locking in your mortgage payments for an extra three years amounts to just £32 per month – that’s about the same as a standard broadband and TV deal, a mobile contract with phone, or a few hours in the pub.
The property market is in something of a holding pattern, as people stall on moving while they wait to see what on earth happens next in Brexit and Election-era Britain, but one section that’s fairly buoyant is first-time buyers.
Those mortgage statistics showed that there were a shade more first-time buyers purchasing properties in September than home movers – with an 50 new homeowners tipping the balance among the 58,150 homes bought.
Life’s a bit more expensive for first-time buyers, but for those who can raise the hefty deposit needed to tackle high house prices there are also some very keen mortgage rates on offer.
The typical first-time buyer borrows £174,223 to buy a £224,800 home and the lowest two-year fix for them would be 1.45 per cent, while a five-year fix is on offer at 1.78 per cent.
A repayment mortgage over 30 years, which is now pretty much standard for first-time buyers, on that two-year fix would cost £597 a month, while a five-year fix would cost £625.
Again the cost of locking in for longer is measly – just £28 a month in this case.
To return to my earlier point, if you need to borrow a certain sum of money then the lower the mortgage rate you can get at the time, the better off you will be.
Zoom out though and the bigger picture is that low rates drive up house prices and thus the amount that you have to borrow.
I have no desire to experience the late 1980s and early 1990s interest rate pain that my parent’s generation faced, but personally, I’d gladly swap today’s low rates and high house prices for slightly higher interest rates and lower property values.
I wonder though if we will ever manage to get back to 4 or 5 per cent rates being normal.
Today’s crop of mortgages are a direct product of the Bank of England still keeping interest rates at emergency levels. You’d hope that in five years’ time we might have got at least 2 per cent higher than the 0.75 per cent the base rate is currently at.
We’d still only be at 2.75 per cent, but if that rise bumped mortgage rates up by a corresponding amount, the best five-year fix for the average homebuyer previously mentioned would be just above 3.5 per cent and monthly payments would be £230 higher at £1,150.
For the first-time buyer above costs would be £185 per month higher.
That’s not breaking the bank stuff, but at a time when lenders are doing what they can to tempt and squeeze borrowers in – with very low rates and longer terms, for example – you can see how even a small rise could have a big effect in aggregate.
The silver lining is that those who can get a mortgage face repayments that are a low percentage of their income by historic standards, at just over 17 per cent. That compares to a 15-year peak of just under 24 per cent at the top of the boom in 2007.
Whether it buys Britain’s homeowners enough breathing space to see interest rates get back to normal remains to be seen.