Interest rates on fixed rate mortgages have been falling recently – despite expectations that the Bank of England will start to increase base rates at some point next year.
It means that you can now get a five year fixed rate mortgage with a sub 3% interest rate and a two year fix with an interest rate of less than 2%. What’s going on?
In part, lenders have put back their expectation of when the Bank will start to increase rates to some time early next year. Until recently, they had assumed that it would be November this year.
But more importantly, this seems to be an unexpected result of new rules on mortgage lending (known in the industry as MMR – it stands for Mortgage Market review) designed to make sure that borrowers can afford their mortgage payments even if interest rates rise. You can find out more about the MMR rules here.
That was followed in June by the announcement that the Bank of England would set new rules to limit the number of mortgages lent to borrowers at more than 4.5 times their income. You can find out more here. The new rules come in to force next week (1st October).
The overall effect has been to limit the ability of banks to grow their business by lending to less creditworthy borrowers or at higher multiples of earnings. All of which has intensified competition for those customers who pass the more rigorous affordability tests now in place.
The net result has been a reduction in rates charged to creditworthy borrowers. Pretty much every major lender announced at some point in September that their fixed rate deals would be cut, including big names such as Barclays, Nationwide and Halifax as well as smaller players such as Virgin Money and Leeds Building Society. Nationwide has even come out with a promise that it will match the lowest rate offered by its six biggest competitors to existing customers thinking of re-mortgaging with another lender.
So, if you are a Nationwide customer and you see a fixed rate on the market lower than you are currently paying, why wouldn’t you tell the building society that you are thinking of switching lender?
The Council of Mortgage Lenders (CML) says that re-mortgaging activity is relatively weak as the prospects of a rise in the base rate meant rates on new mortgages are no better than existing rates. But with more competition between lenders, now might be a good time to take another look.