Mortgage lenders dropping rates – a good sign for the future?
After a worrying year for homeowners, July saw the first signs that the housing market may be on the road to recovery. According to a BBC report, numerous lenders’ fixed rates on mortgages have dropped in the past month, with some lenders dropping their rates several times as they attempt to gain a foothold in the market.
The rate cuts immediately follow June’s highest fixed rates since February 2000, at an average 6.6% for a mortgage with a 25% deposit. This may cause some to suggest July’s figures are an anomaly – but the fact that so many banks did the same thing would indicate that there was some driving force behind it.
That driving force could well be the recent fall in ‘swap rates’ between banks – the rates at which financial institutions lend to one another – also known as ‘liquidity’. A slowdown in liquidity between financial institutions was a large part of what caused the credit crunch – so an improvement here may suggest that the housing market is on the way to recovery.
This, coupled with The Independent’s report that low supply caused by incomplete housing projects may cause house prices to rise by 2010, paves a clear path for market recovery over the next 18 months. But is it as clear cut as that?
Mortgage lenders: testing the waters?
Melanie Taylor, Head of Corporate Relations at ThinkMoney.com, says the news is good for the housing market, but should not be taken as a guarantee of long-term recovery.
“In terms of interest rates, July was a better time to take out a mortgage, so long as you are not looking to sell again in the near future,” she said. “But whether we can expect to see mortgage lenders continue this behaviour remains to be seen.
“It may well be that lenders are simply ‘testing the waters’ – gauging the response from homebuyers to the new rates. If the response is good, the rates may well continue to fall and this could help the mortgage market recover as a whole. Alternatively, if there is a change in the lenders’ circumstances, rates could rise again slightly.”
Taylor also said that there is something of a see-saw effect between interest rates and mortgage arrangement fees. “Typically, the lower interest rates come with a higher mortgage arrangement fee, and vice versa, so this needs to be considered when looking for a mortgage.
“People without large deposits may be unable to get the better interest rates. Mortgages with lower deposits are seen as a higher risk by lenders, so interest rates tend to go up accordingly. Only when the market fully recovers are we likely to see this change.”