Mortgage Rate
The rate of interest that you pay on your mortgage is determined by the Bank of England, and the mortgage rate will go up or down depending on any number of economic factors. The Bank of England’s monetary policy committee agree on the interest rates on a monthly basis, the economy as a whole is of major interest to any body who owns their own property. One of the major driving forces behind the UK interest rates is the overall state of the UK economy, during periods of boom and when the economy is growing people have jobs and savings which can then be lent out to the borrowers through the financial institutions. This in turn will enable more people to borrow and the mortgage interest rate will, if these trends continue, rise. It is important that the bank of England keep good control over the level of the interest rates, if there is too much borrowing then this can destabilise the economy, on the other hand if there is not enough then the reverse can happen and the markets stagnate. Generally when the demand for funds is low then the interest rates will fall. If we take a look at the market today the current mortgage rate is determined by the base rate of interest and this is set at 5.25%. This is not a high rate of interest however the UK economy has been enjoying great success over the last few years and enjoyed a low of just 3.5% from July to October 2003. The UK home owner during this period would have been enjoying the lowest mortgage rate of interest, compare this too the mid to late 1980s where the base rate of interest was hovering around 15% which is very high and usually signifies that there is or was a recession. Inflationary factors will also have a large influence on the amount of money which is loaned out and ultimately affect the mortgage rate, generally if there is uncertainty within the economy and inflation looks to be on the increase then the lenders will be more reluctant to lend money during that period of time and the lender will be looking to increase their rates. In short this means that inflation drives interest rates higher and in turn you will be likely to see an increase in your current mortgage rate. The UK economy though is not the only influence behind our mortgage interest rate; international economies can play a huge role in what happens within our own country. Just recently the US markets have seen a large element of uncertainty within the housing sector which has led to a property price crash. The cause of this decline is fundamentally attributed to the sub prime lenders and the investment banks, and the increase in the exposure to bad mortgage debt. Some of the largest investment banks in the world have been hard hit by these problems to the tune of over eighteen billion pounds. This has sparked an overhaul of how the banks have financed their lending for mortgages in the US and has had a direct effect on the UK markets. The US Federal Reserve took the steps to lower their mortgage interest rate by three quarters of a percent to try to boost the economy, due to the problems in the US the world economies had to react. As mentioned previously the UK lowered the interest rates and it is widely predicted that the UK mortgage rate could well drop to as far as four percent over the next 2 years. In the next few months it is widely anticipated that the Bank of England will be looking to cut the interest rates lower maybe down by another quarter of a percent to 5%. This will be a welcome relief to thousands of the UK homeowners who are experiencing ever increasing cost levels in the basics of life such as fuel and food. If the rate does come down to 5% then this will be the lowest mortgage rate since November/December 2006. The threat of a recession has forced the bank of England to lower the rates with affordability a real issue for many people the interest rate cuts will provide some breathing space. The markets however still remain in a state of change and anything could happen. The uncertainty in the markets does not directly affect anybody who has taken out a fixed rate mortgage, however there are expected to be many thousands of people who were on a five year fixed rate mortgage deals that may have enjoyed interest rate payments of 4% that will becoming to the end of their terms. This will mean that the mortgage interest rate changes will be delayed and this could cause an additional spending reduction in the future, thus putting even more pressure onto the markets. Looking to the future the direction that the interest rates go will depend on the forecasts for inflation and economic growth. The target for inflation for the Monetary Policy Committee is for 2%, if inflation rises above this level then there will be significant pressure on the bank of England to increase the level of interest rates to reduce spending and stabilize the economy. There is however a number of factors that could suggest that the UK rates have peaked and the interest rates will fall again. The supply and demand factors will come into effect, with the number of mortgage approvals having fallen and with the US problems along with the credit crunch people are finding it harder to obtain credit. The fewer people who are getting mortgage approvals or moving home this will start to push the house prices down again, likewise so can increasing interest rates, in the early 1990s interest rates were at 15% which caused the housing market to collapse. The markets are facing a period of uncertainty and many people will be keeping a very close eye on what the next move will be.