I, like many of you, joined the workforce in the late 90s. In that time, it is fair to say the world has changed forever. We can look back longingly at Sega Megadrive, one landline per household, an era pre-internet, and smartphones. It feels more like a new epoch than a new decade every ten years. So the world has truly changed forever, and perhaps, so have the ‘best’ mortgage rates.
Historic ‘best’ interest rates
In 1999 when I started working, the Bank of England Base rate was at 5.5% at the end of that year. This meant that market-leading mortgage rates would be have been circa 6%, with many people paying 8% or more on their mortgage.
It is tough to get actual figures as this was an era before price comparison sites and easily accessible financial information. This was seen as good when you compare the eye-watering high of 17% in December 1979, which means you may well have been paying 20% for your mortgage! Those memories were still fresh.
If you are interested, the long term average rate for the Bank of England is 5%, but we are unlikely to see the benchmark rate go that high in our lifetime, this is driven by 2 key factors:
- As the Bank of England is currently at 0.1%, even moving the base rate back to 1% is a 10 fold increase in the baseline cost of funding. You wouldn’t go from 5% to 50% quickly, and the principle still applies when rates are so low. It is more comparable to being hooked on a drug, you can go cold turkey, but it is very hard on you! Hence, it is so hard to move out of a low-interest-rate environment, as Japan experienced in the ’90s and to this day, where the term stagflation was coined (which refers to low growth, low rates, and low inflation – sound familiar?)
- The highest levels of debt we have ever seen. Individuals, Governments, and companies have never been in such high levels of debt. So if you take the above point, you simply can’t raise interest rates quickly or you will sink many of those entities very quickly indeed. PWC conducted some research to see what the effect was in debt post-Covid. Unsecured debt grew by 11%, which is almost £80m a day and projected to exceed £340bn by the end of the year… the FCA believes that total mortgage debt in the UK, by the end of Q1 2021 is at £1,561.8bn. That is 26% higher than the same period last year and still on an upward trajectory. UK National debt is over £2 trillion and still increasing month on month. Which is 84% of national GDP according to the Office for National Statistics.
What do policymakers do?
So with the combination of low-interest rates, and truly staggering levels of debt, what do policymakers do? Inflation is currently on the rise in the UK and could go as high as 4% by the end of 2021. In ‘normal’ times, the Bank of England would raise interest rates to bring inflation back in line, but post-Covid, that is not so easy. Spending is still below the levels it was pre-Covid, so raising interest rates will be unhelpful to the economic recovery. Also, many companies are hanging on by their fingertips, so any reduction in spending or increases in debt costs could tip them over the edge. A very, very difficult puzzle to solve in the coming months.
That leaves the ‘best’ mortgage rates in limbo. In both senses of the word, as again:
- We are a bit stuck where we are with very low-interest rates for some time to come. That is bad for savers but good for borrowers, which just increases debt levels and reduces savings, which is a bad dynamic for anyone’s finances.
- Lenders are ‘literally’ doing a limbo dance to offer the best mortgage rates! At the time of writing, the main high street lenders are having to offer SUB 1% rates to attract the best borrower. I will repeat that, sub 1%. There are multiple options now for a mortgage where the rate starts with a zero… I very clearly remember a time when any rate sub 5% was seen as a great deal, so being sub 1% is a very surreal place to old dogs like me.
‘Best’ mortgage rates can’t get any lower than they are?
I have said on a few occasions in recent years that the ‘best’ mortgage rates can’t get any lower than they do… maybe it is because of the factors above, or maybe it is down to the financial smoke and mirrors that is quantitative easing, and the post-Covid economic shock is undoubtedly a factor.
In fact, just a few months ago financial markets had bet on the Base rate going negative in the UK (get your head around that one, potentially being charged for keeping your savings in a bank…), so while that pressure has subsided, for now, it is clearly too early to tell if mortgage rates in the UK have bottomed out.
There are strong indications that the rates we are being offered now and over the summer may well be the lowest in history, but that comes with a huge Steve Bunce Asterix (a reference for any fight fans), which means if we do have a ‘bad’ third wave of Covid or the collapse of the international market for any one of the very many reasons that may cause that, mortgage rates could go lower. But as a betting man, I would say we are close to the bottom, so now could finally be the time to lock into a longer-term deal if that is a suitable thing for you to do.
To determine if that is suitable or not, please do pick up with one of our advisors and we will happily talk over what this means for you, and your specific circumstances.