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/

We seem to be hovering around the new normal. Rates may fluctuate + - .5% but here we are. It may well settle .5 higher as inflation cannot, nor is desirable, to be at near zero.
Not sure the banks price war will continue, even if it is only a handful of mortgages in the grand scheme of things.

I agree that it would have been v difficult for the BOE to cut today, although I'm sure they wanted to. Things seem to be a bit of control in the bond markets in the last few days.
As I've said before, I think the most likely scenario is that we will see a recession first, with deflation is non essentials while costs of essentials continues to rise. I suspect house prices will reduce more, although whether the media report it is another matter.
Once the QE starts up again, possibly in 2025, I think we see much, much more inflation and resulting base rate increases. Stagflation is then highly likely longer term imo.
Of course, there are very likely to be 'black swan' events in the fairly near future. Sadly, the UK is particularly at risk of things getting much worse.

I dunno re: UK getting worse. I think that I'd rather be in the UK right now than in Germany, for example, or France. We have a government that has at least taken one hard decision (winter fuel payments), and whilst I don't think the NI increase was that great, it should give some better immediate income stream to the Treasury.

And UK wages are low compared to other countries - which does matter for inward investment.

My main area of concern is whether Germany can successfully deindustrialise. They cooked their own goose by being very, very naive wrt China, who is now eating their lunch.

Interest rates held as Bank says economy doing worse

UK interest rates have been held at 4.75% after the Bank of England voted to keep borrowing costs unchanged.
In an unexpected split, three members of the nine-member rate-setting committee wanted to cut rates to 4.5% to boost growth.
The Bank said it thought the economy had performed worse than expected, with no growth at all between October and December.
Rates are still expected to fall gradually next year, with the first cut possibly coming in February.
Commenting on the decision, Bank governor Andrew Bailey said: "We think a gradual approach to future interest rate cuts remains right but with the heightened uncertainty in the economy we can't commit to when or by how much we will cut rates in the coming year."
Speaking later to reporters, Mr Bailey said he thought the path for interest rates was "downwards", but added: "The world is too uncertain."
"We will come back in February at our next meeting and review it [interest rates] again."
Figures this week showed that both inflation was higher than the Bank's target and wages were growing faster than expected.
But the economy is struggling. Last month, the Bank forecast growth of 0.3% in the final three months of the year, but it now expects 0%.

https://www.bbc.co.uk/news/articles/cd75yq1zlzqo

Yes.

The Germans also undermined their own energy supply. Which for a country involved in large amounts of industrial production was not the smartest move.

The thing I cannot quite figure out is why EZ bond yields are so low. In the past my feeling was that the strength of the core was holding them down. But now you have so many of the core economies like Germany on what seems like a downward spiral I just can't figure out why. Maybe the sheer size of the EU is their strength, or maybe underpinned with the invincibility of German manufacturing. But will that go on forever...

I agree that Germany and France are v badly off too. Germany has shot itself in the foot wrt the energy situation and is now shutting down some of its world renowned manufacturing which is very sad. The French government is obviously in a mess; the French are far less tolerant of things than the British (more fool them!). Luckily for the French and Germans, their housing market is not as disastrous as that in the UK!
Unfortunately, the UK is worse off if anything, with huge total financial liabilities and longstanding, high trade account deficit.

The reason why EU yields are low, it’s the EUs monetary power to buy their own bonds historically.

https://www.bruegel.org/policy-brief/rising-cost-european-union-borrowing-and-what-do-about-it

That will all change once the euro inflates away (it’s already heading to parity with the $)
The EU model doesn’t work in an inflation environment (remember they briefly skated around the notion of negative rates) only disinflation (which we’ve had for 40 years).

Without German manufacturing, and French cheap nuclear power, the EU is finished. They are chained to a number of nations with high debt like Italy (see Greece after 2008 but bigger).

I voted for Brexit for this very reason and no other. An inflation cycle was always coming after 2008 when the monetary QE tools used since, started failing to work when the can could no longer still be kicked into the long grass.

GB10Y highest since 2008

GB30Y 80bps away from highest level since 1998

Where are interest rates headed in 2025 and what will this mean for mortgages?

This is Money asked two major banks, Barclays and Santander, for their predictions, as well as economists from Capital Economics and Oxford Economics for their views.

Santander: Interest rates to end next year at 3.75%
Barclays: Interest rates to end next year at 3.5%
Capital Economics: Interest rates to end next year at 3.75%* *
Oxford Economics: Interest rates to end next year at 3.75%

Where will fixed mortgage rates end up?
Fixed mortgage rate pricing does not react to interest rates. Instead, mortgage rates preempt interest rate changes. This means that future interest rate cuts by the Bank of England are already somewhat baked into fixed rate mortgage pricing. This is why the lowest priced five-year fixed rate products are hovering just above 4%, rather than above the Bank of England base rate at 4.75%.

If interest rates are cut in line with market forecasts and reach 4% by the end of next year - the mortgage rates that will be on offer at the end of next year will reflect what markets then think will happen to interest rates even further in the future. If, for example, lenders think interest rates will be cut to 3% or lower by the end of 2026, then the fixed mortgage rates on offer may be lower than they are now. However, if lenders are of the view that interest rates will remain at 4%per cent, then mortgage rates are unlikely to be lower and potentially they may even be higher.

https://www.thisismoney.co.uk/money/mortgageshome/article-14213775/Where-rates-headed-2025-mean-mortgages.html

https://www.telegraph.co.uk./business/2024/12/30/house-prices-plunge-across-london/

Yields rising (and continuing to rise) and corresponding effect on swap rates is now apparent in London house price statistics.

This will start to filter out into the areas that saw the biggest rises after Covid.

@Lightscribe

Apologies for not saying thanks for this very interesting post.

PS I note the 10 year gilt is now above 4.75%.

What’s all this about 4 rate cuts next year then?

Well 2025 hasn’t happened yet so it’s a bit soon to say! But from what I’m reading most estimates seem to be down to 2 or 3 now. Time will tell.

Yes, very interesting.
I wonder if Germany will try to save itself by allying with Russia.

I see that the 30 year gilt is now at 1998 levels referencing @Lightscribe's post above.

I still think that we will see a big collapse in yields short term, ie maybe more than 4 rate cuts or some large ones. I totally agree that the longer term pattern is one of inflation, specifically stagflation. Whatever happens short term with base rates, it makes little difference really because neither scenario is positive.

All these experts haven't exactly been right in their projections so far have they?

You guys sound like you understand all this better than me. Can you explain what the implications are for house prices? Trying to educate myself. Thank you 🙏

Some people would argue house prices are a function of how much money the banks will lend people to buy them.

The higher the cost of money (mortgage rates) the lower the total amount of money will be lent by the banks to people to buy houses, as people will only be able to afford paying smaller mortgage values if the rates are higher.

Gilt yields increasing are indicative of mortgage rates increasing.

I'd agree with this.

My late Mum used to say they saw increases when the lending changed to include a wife's earnings!

I don't understand how they've stayed so high with the obvious settlement of rates at a higher level (albeit who knows what level that may be).

Medium sized 3 bed family homes in his area in the 250k - 300k bracket seem to sell quite quickly if "sensibly priced" when they first come to market.

I worry for my DS who is buying now as he needs to start putting down roots. It's dreadful that something so important runs investment risk. Still, he's buying a place that can take a lodger as its got a spare ensuite room, but slightly smaller than he could afford to ensure a decent LTV, so he has some buffer against future increased rates (he's nailed 3.69 for 5 years on this purchase). He will save what he can to help when the 5 year term expires. What else can he realistically do apart from move rental (which is also expensive and difficult to find).

He’s doing a sensible thing and 3.69% is a good rate.

Yes that rate was the one good thing that came out of a sale that he pulled out of a few months back due to dreadful survey! The offer lasts until early April 2025, so hopefully this chain he is in (started early December) will be pulled off for the end of March 25 for the stamp duty saving for the others in the, luckily short, chain and he will keep that rate.

Just been talking to him and he intends to spend 6 months inviting us and mates to stay and then he will get a lodger in the ensuite room. He plans to come out of the 5 year rate with a decent level of savings from the lodger profit and from his salary to protect himself against this complete unknown.

I hope it all works out for him. At least everyone in the chain should be committed to completion by the end of March.

He is in a fortunate position to be able to afford to buy a place bigger than he actually needs so can benefit financially from getting a lodger. I think it sounds like he is making sensible choices. There is no risk free option whether people rent or buy.

The market is a lot more complex than when previous major house price declines have occured, the last one probably being in the 1990s. There was a bit of a blip at the GFC around 2008, but it wasn't a major correction.

Mortgages no longer react instantly to the base rate but are fixed at a 2 year minimum normally and often 5 years. A substantial proportion of people who fixed for 5 years before the Truss correction are still paying lower rates. Increases in rates are fed more slowly into the system than in the past.

You also have to consider supply and demand as a factor. There is still a lot of demand out there for housing and the number of people wanting it is going up and the new housing being built has not been huge over the past few years (signs are that under Labour this may change but I am not holding my breath). Anything sensibly priced will still sell.

What has happened rather than a price correction is that volume has shrunk hugely. My guess is that time on the market has shot up too. This is a result of prices being too sticky (owners refusing to lower the price and buyers being unable to raise the money to buy), somewhat evidenced by the large number of "why isn't my house selling" posts on here.

Will something happen to panic sellers into a rush to sell via lowering prices ? I am not convinced. The British seem to have an irrational love of property and it has proven very difficult to shake the myth that property is a one way bet. If something does happen it will probably be due to external forces from outside the UK, like a run on GBP and mortgage rates skyrocketing over a short period - otherwise I think we are in for a period of little change/stagnation in prices, which at the moment aren't even keeping up with inflation despite small % rises.

Yeah that would make sense.

We had negative equity in the 1990s.

Our first house had been circa 69k in late 80s. We bought when we thought values had fallen as much as they ever would and paid 52k in 1991. We sold in 1994 for 48k after even more price correction.

When we were looking for that second property in 1994 most were repossessions - dreadfully sad with ripped out kitchens and one had a carpet slit all over and it felt like it had been done in a emotional rage. It didn't take long for repossessions to be undertaken by banks back then. I think these rules have changed for the better now.

We had to find a new deposit of 5 percent and dig ourselves out of that small negative equity but we moved upmarket much cheaper. We are still in that house now - 30 years later!

The irrational love of property is true but is somewhat explained by the limits when living in rental. The 2 month notice period. The rules on pets. The rules on not painting it daft colours and not putting nails in the walls. The fact you've left home and are adulting but sort of have this person "breathing down your neck" and visiting occasionally to check on you! Whilst paying for repairs is expensive at least you have control over getting safety stuff done quickly and you can make practical improvements that make your life easier, like adding a shed for storage, without having to revert to the "higher being".

Your late Mum was 100% right. House prices are definitely a function of the amount of money lenders will lend. This is mostly related to regulation (lack of), which has been massively loosened since the 70s/80s. Salaries are also relevant as lending is based on multiples of these. Judging by recent lending, the mortgage rates don't seem to have reduced salary multiples much, as they should have done logically.
It sounds as if your son is one of the smart FTBs who have done their research carefully so hopefully it will all work out for him.

I don't know if this will be at all helpful @Learsfool
No one actually knows for sure what will happen to house prices/ interest rates and when. Lots of people, apparent experts, give opinions and they are nearly always wrong so we may all be wrong too!

@GasPanic has already made some good points.
It is true that house prices may decline slowly, at least in real terms (ex inflation) over a long period of time, with variations between different types of houses and areas, because of increasingly constrained affordability and demographic pressures (less young people able to buy Boomer's expensive houses when the pass away). This is what has been happening since around mid 22.

I think that we approaching a prolonged recession now (admittedly I have thought this for a while and we have only had a brief period of official recession so far). I think we will continue to see increased job losses, assisted by Reeves's increased tax on employers and also increased business insolvencies. I therefore expect to see wages falling in many sectors. As @GasPanic said, there is a high likelihood of 'financial events' in the short-medium term even. If we see, for example a run on the £ and then base rates having to rise rapidly or a collapse in the stock market, we will see rapid declines in house prices imo, despite attempts to prop everything up.

Yes that follows with our experience.

The mortgage borrowing possibility for my son was eye-watering to be honest. They calculated his affordability (pretty good salary, no dependents, no loans etc) and then offered terms up to 35 years because he is 26. To be fair they were all repayment - none of that interest only shenanigans. But this will allow buyers to purchase at highest values by pushing to longer terms.

His reaction was "Wooooo. Stop. Recalculate purchase price max - base it on 25 years, my given deposit and a max £950 a month payment for 5 years fixed, please"