5% mortgage rates (again)

[Twiglets1]

Following on from the previous two of these threads both with 6% mortgage rates in the title, I think it's more realistic to return to 5% for this one.

According to this Rightmove article, the current average mortgage rate for a five-year fixed rate mortgage is 4.84%, up from 4.85% last week. The current average rate for a two-year fixed rate mortgage is 5.23%, which is unchanged from last week. The lowest available five-year fixed rate is 4.13%, and the lowest available two-year fixed rate is 4.46% – both unchanged from last week.

On 27th March, the average 5 year fixed rate mortgage for someone with a 60% LTV was 4.35%.
For someone with a 75% LTV it was 4.72% whereas 80% was 4.79%.

For someone with a 90% LTV it was 4.98% whereas 95% was 5.47%.

Two year fixed rate mortgages are slightly higher.

https://www.rightmove.co.uk/news/articles/property-news/current-uk-mortgage-rates/

I don’t mind you considering it idealistic @rainingsnoring I think it’s good to have ideals and values but I think you’re wrong if you’re assuming that most young people don’t care about the NHS etc or resent paying for good public services.

Young people are more likely to vote Labour than older people after all. They knew that Labour would invest in the public sector because they always do. It’s the pensioners who had most to fear from a change of government and who tended to vote Conservative.

Let’s hope Labour do something to help young people & workers on a low income. I think it was good that they raised the minimum wage.

Exactly. The tax system is very unbalanced and unfair. I strongly suspect that older people would complain a great deal is Labour or any other party introduced a land value tax or re-banded council taxes to reflect current property values, meaning that those in London and the SE had to pay far more and those in cheaper properties less.
It's jolly easy to spend other people's incomes, especially when most of the spending goes on you and your cohort!

I didn't say that most young people don't care about the NHS, @Twiglets1! I said that they are being financially squeezed from all angles and that it is not fair to ask them to keep paying more and more in a system that is heavily skewed against them.
I think a lot of young people voted Labour because the Tories were shockingly bad and they wanted change rather than because they have any faith in Labour. Indeed, a large percentage of them voted Reform! That's a protest vote.

While the rise in NMW will help a small % of people, it also needs to be born in mind that it will cause major problems for SMEs, which are huge employers in this country. It will inevitably lead to more of these people losing their jobs, having to claim benefits and being poorer. This will only worsen already rising unemployment and reduce non essential spending. Policy changes are choices with pros and cons. I don't think raising employer's NI was a good choice overall.

Hmm. Bond yields are continuing to rise today. I really hope they fall back again otherwise the problems will be exacerbated further.

https://www.marketwatch.com/investing/bond/tmbmkgb-10y?countrycode=bx

Can anyone please explain - as you might to a child! - the significance of bond yields in the context of interest rates (and perhaps what bond yields actually are? 🙈)
Google tells me that interest rates and bond yields are inversely related, but then why would rising bond yields be a bad thing? Does that not mean interest rates are falling, i.e. a good thing?

Markets are voting on the budget and voting it as a disaster.

UK 10 year gilt yield I believe has never been higher post Truss.

£££ lost a lot yesterday, recovered but is now back to where it was and lower.

I see the 2 year yield is up almost 5% today.

Funnily enough, I've just been chatting to my 15 yr old DD about this and giving her some explanations!
I am not an economist nor do I work in finance or anything related so this is only from my own reading in the last few years.

Bond or gilt yields are the interest payment that market investors demand to take on government debt. In times where inflation is higher or they perceive a greater risk of defaults on debt because of over borrowing without tax rises (eg Truss/ Kwarteng), yields rise. They are directly linked to the interest rates that banks and other financial organisations need to pay to each other to borrow money. This means that with higher yields, the rates that are charged to customers eg mortgage holders or businesses needing loans, rises. This is exactly what has happened since 2022.
The yields are inversely related to the value of the bond NOT to interest rates. This is why a number of banks, and no doubt other financial organisations, have been in trouble recently because they bought bonds previously at low yield (interest rate) and now the value of the bond (the underlying asset) has fallen. Remember, both bank base rates and yields have been very low since the great financial crisis and were zero (or negative in real terms) during the pandemic period. The rapid rise in rates has caused problems for banks, governments, businesses and individuals, especially those paying mortgages. For governments, it means that interest payments to central banks have risen a great deal and that a larger percentage of tax receipts goes to service these and less can go on other spending. If bond yields rise even more, see chart I linked to above, the situation worsens. The worst case scenario would be a run on the £ where 'bond vigilantes' demand higher and higher rates to support UK government borrowing, pushing the costs up hugely. This would force the BOE to raise base rates a great deal to protect the currency (£) and would increase the cost for importers and therefore the whole population because we import a great deal in the UK, although some would be worse affected than others. For businesses, the situation is the same in essence and this is one reason why many businesses are struggling. For holders of debt or those who want to take out a loan eg people paying a mortgage, the interest charges, and therefore the overall cost, is much higher.

I hope this makes some sense! Please ignore the latter comments if they are a bit confusing/ complicated.

Bond yields and mortgage rates are closely linked. This is getting pretty serious - there could be some budget backtracking if yields keep rising like this

It's a little over 4.5% at present but it has risen 10bp today which is a lot. As I said, I really hope it falls back and calms back down.

I will try.

Let's say we have an investor. Miss Big Investor. She has £10,000 to invest.

Miss Big Investor can invest that in one of two places :

a) Government 10 year Bond.

b) Mrs Miggins Pie Shop Mortgage.

If she invests in the Bond, that is viewed as relatively risk free. The UK government mostly pays its debts.

However if she invests in the pie shop, it is a lot more risky. Mrs Miggins might burn the pie shop down by accident and be unable to repay the mortgage. Or she might run off with Mr Percy and never come back, leaving the pie shop to go bankrupt.

So Miss Big Investor wants an increased return for lending to the pie shop over the government. It must be more than the government, based on the increased risk she might never get her money back from the pie shop and is much more likely to get her money back from the government.

The government bonds are considered the "risk free" rate, and the mortgage the "increased risk" rate. The mortgage will always be more than the risk free rate and will generally track it (if Miss Big Investor thinks lending to the government is generally less risky than lending to the pie shop). So if the return on the government bond goes up then generally so will the mortgage rate charged to the pie shop.

So that is the basics. You might ask the question, if the government bond is "risk free" how come the price of it ever changes. And the answer to this is that is the word "relatively" above.

@rainingsnoring I agree lots of young people only voted Labour ( or one of the other options ) because they wanted to see a change - anyone but the Tories.

But many others of course voted Labour because they are genuinely hopeful that Labour can make the country better. Not as jaded as older people yet.

If people care about the NHS then it needs to be funded by taxes, whether that’s a popular opinion from people like me or not.

@Twiglets1 ’If people care about the NHS then it needs to be funded by taxes, whether that’s a popular opinion from people like me or not.’

Unfortunately that is the current model therefore current solution. No government seems brave enough to review this.

'If people care about the NHS then it needs to be funded by taxes, whether that’s a popular opinion from people like me or not.'

Assuming we accept the NHS as it is (many don't), there are different types of taxation, some fairer than others. They could, for example, start making pensioners pay NI on their income or introduce a land value tax, which would affect those in the most expensive homes or increases taxes on second homes, particularly those that aren't used. They could consider a wealth tax (very unlikely). They could have increased CGT on property sales or introduced it on sale of primary residence.
Or, they could carry on raising taxes on working people and disincentive work further and cause more young people to leave, worsening the problem.
With regards the NHS, it is a model that cannot work long term. It will need to be reformed and there will need to be some sort of charges or a partial insurance system introduced.

Guardian article: UK’s borrowing costs rise as Reeves’s budget prompts fears of slower interest rate cuts

UK government borrowing costs have risen to their highest level this year as City investors bet Rachel Reeves’s budget would lead the Bank of England to adopt a more cautious approach to cutting interest rates.

The yield – in effect the interest rate – on benchmark 10-year UK government bonds rose by more than 0.15 percentage points to trade above 4.5% on Thursday, before falling back slightly, as financial markets reacted to Labour’s first budget in 14 years.

Before the budget, financial markets widely expected the central bank to cut interest rates from their current 5% to about 3.75% by the end of next year, with a first quarter-point reduction on Thursday next week.

However, the Office for Budget Responsibility, the independent Treasury watchdog, said it had raised its prediction for the base rate by 0.25 percentage points across its five-year forecast to reflect the additional stimulus Reeves’s budget would have on the economy.

Financial markets moved after the budget to price in fewer reductions in the base rate, predicting it would reach about 4% by the end of next year.

https://www.theguardian.com/business/2024/oct/31/uks-borrowing-costs-rise-as-reevess-budget-prompts-fears-of-slower-interest-rate-cuts

The interest rates are now ‘about normal’. Dropping .25% or .5% is not going to shift the housing market noticeably. I don’t know what the answer is apart from static/dropping house prices, they have obviously overshot affordability.
All eyes to America, I guess what happens next week will have an impact on financial markets, though I don’t know how.

The Guardian today: City analysts overwhelmingly predict Bank of England interest rate cut

The Bank of England policymakers are widely expected to cut borrowing costs for businesses and homeowners by reducing official interest rates from 5% to 4.75% when they meet later today.

Financial markets are overwhelmingly forecasting that the Bank’s nine-strong monetary policy committee (MPC) will reduce rates for a second time when it announces its latest decision at noon.

Markets believe there is a 96% chance of a cut, with the Bank citing the fall in the headline rate of inflation to 1.7% and an easing of underlying price pressures as justification for the move.

Some analysts said the boost to growth provided by Rachel Reeves’s package might make the Bank more wary of future rate cuts after Thursday’s decision.

Paul Dales, Capital Economics said: “The Bank of England will almost certainly cut interest rates for the second time in this cycle, from 5% to 4.75%, at the meeting on Thursday 7 November. But it is unlikely to hint that it intends to quicken the pace by cutting rates again at the following meeting in December.”

The Bank of England’s announcement on interest rates will be followed later on Thursday by the latest decision from the US Federal Reserve on US borrowing costs. Despite the expectation on Wall Street that a second Donald Trump presidency will lead to lower growth and higher inflation in the US, the Fed is also expected to cut rates by 0.25 points.

www.theguardian.com/business/2024/nov/07/city-analysts-overwhelmingly-predict-bank-of-england-interest-rate-cut

The Fed are expected to cut 0.25% today so the BOE will v likely follow suit. However, yields in both the US and the UK have risen considerably since the previous cuts so mortgage rates have risen, not fallen.
The 10 year is at 4.558% currently. It was just under 4% when they cut in August!

https://www.marketwatch.com/investing/bond/tmbmkgb-10y?countrycode=bx

I believe the BOE announcement comes before the Fed so they won’t exactly be following them!

But yes, as stated in the Guardian article I posted (& other sources) both are expected to fall by 0.25% today

It does look as if it may be this time @Twiglets1 but that's extremely unusual. If you look at the dates of the meetings in the UK they all fall just after the Fed meetings. That's because they follow them in their decision making process. I'm sure, on this occasion, there will be communication between the two central banks (Fed meeting is 6-7th Nov, BOE 7th Nov).

I'm not sure if you understand what I said or not about a base rate cut not necessarily lowering mortgage rates. In fact, the opposite has happened in the last few months.

I feel that we will get a rate cut today, not because I think the BOE actually want to, but because they do not like surprising the markets and the concept of a cut has been telegraphed for a long time.

I think really the BOE wants to raise rates. Gilt yields are trending upwards, and my guess is they will move further upwards to match US increases that are expected as Trump gets in.

Mortgage rates will reflect the cost of money in the markets for the respective terms better than the BOE overnight rate. The BOE overnight rate is a proxy for mortgage rates only in the respect that it tends to track things like the broader gilt yields. There are better proxys easily available for what mortage rate direction is likely to go in.

The BOE overnight rate is very much outdated as a predictor for mortgage rates imo, even if mortgage rates have recently generally tracked it. But people like the "big number goes up or down" simplicity of it without having to do much thought.

Yes of course I understand what you said, stop patronising me.

And the BOE hasn’t always just followed the Fed, they started to cut rates before them in fact. And no I don’t need you to explain to me that they are influenced by the Fed.

Pleased to hear that you understand about swap rates, the influence of the Fed, etc @Twiglets1
It's just that you keep linking to articles about base rate cuts and other people's opinions but haven't commented on the fact that yields have actually risen quite a lot. I do think they will fall but probably next year.

Generally speaking I continue to expect mortgage rates to slowly fall @rainingsnoring though not drastically. But that doesn’t mean individual Lenders won’t increase their rates from time to time. Of course they will but in my opinion the trend will be downwards.

I don’t need to comment on yields rising because I can rely on others to do that like you & @GasPanic I don’t follow them particularly but you do.

This thread is intended to be helpful to people wanting information on what to expect from mortgage rates now & over the next couple of years & base rate cuts are relevant to that. So are swap rates & yield rates so it’s nice if everyone can feel free to post whatever information they want without others being patronising or argumentative.

Bank of England cuts interest rates to 4.75%, in second reduction this year

• The Bank of England has cut interest rates to 4.75% in a widely expected move
• It's the second cut in the base rate this year - it came down from 5.25% to 5% in August
• Bank of England governor Andrew Bailey says it is "likely that interest rates will continue to fall gradually from here" - but adds inflation needs to stay close to the 2% target
• It is clear the Bank thinks last week’s Budget has added to inflationary pressures, writes our economics editor Faisal Islam

For anyone interested, the Fed will announce its decision re their new rate at 2 pm ET