Mortgage rates come down

Good news for mortgages, as major mortgage providers announce a series of reductions in rates. Each one may not be huge, but as the BBC puts it: “The new rates highlight the trend of recent weeks in which many lenders have made a succession of small reductions to cut headline rates to 6% or less”.

Why did mortgage rates go up?

For the last year or so, the amount of money available for borrowers has been limited. Mortgage providers have, in general, been forced to pay more when they borrow money. They’ve also been worried about the future of house prices and about recovering the money they’ve already lent out. So they’ve been requiring larger deposits and raising the cost of their mortgages.

What’s the effect of higher mortgage rates? This has limited the number of would-be homeowners able to get a mortgage – reducing the demand (for houses) that could have kept prices from falling so quickly.

It’s a sort of ‘vicious circle’, as:

• it’s hard for house prices to recover when there aren’t enough buyers, but…
• it’s hard for lenders to reduce the cost of mortgages when they’re worried house prices will keep on falling

Plus, buyers aren’t the only ones looking for a mortgage. Plenty of homeowners are coming to the end of their fixed-rate mortgage and looking for a new mortgage deal. If they can’t find a mortgage they can afford, they might have to sell. That’s bad news for them and bad news for the housing market in general – when the supply of houses goes up and demand for them goes down, prices drop even faster.

So the news about falling mortgage rates comes as a big relief.

Why are mortgage rates coming down now? One major reason mortgage rates are dropping is the fall in ‘swap rates’: conditions in the international money market are improving, so mortgage providers are now paying less for the money they borrow. That means they can offer cheaper mortgages.

What does the future hold?

Any fall in mortgage rates is an encouraging sign for would-be homeowners, which means it’s good news for sellers too – the more potential buyers who can get a mortgage, the easier it is for sellers to get a good price for their property.

As the National Housing Federation points out, recent problems in the housing market could actually accelerate price increases in the not-too-distant future:

“Hit by a slump in transactions and falling prices, developers produced fewer than 30,000 homes in the first quarter of 2008.”
‘Home Truths 2008’ report from the National Housing Federation

As this is so far short of the Government’s target of 240,000 per year, it looks like there won’t be enough new houses to keep up with demand once the cost of mortgages sinks further – and high demand, of course, means high prices.

Tags: mortgage, mortgage rates, falling mortgage rates

Fees payable when continuing service is provided. Repaying debt over a longer period may increase the total amount to be repaid. Calls are recorded and are usually free from UK landlines. Mobile phone users may be charged and should check with their service provider. Cards are provided by third parties and are subject to eligibility, status and terms and conditions. Applicants must be UK residents aged 18 or over.