I thought this would be an interesting post as it is something in peoples minds at the moment.
Last week I was on a webinar with a Mortgage lender and they were discussing why interest rates have remained so low and what they expect to happen over the coming year and a little further down the line.
Why have interest rates been low?
This was something that surprised me, but as they went deeper into the explanation it started to make sense.
In a word – Covid.
Believe it or not, Covid helped to keep rates low but not because of concerns about jobs etc. There were a few things that came in to play, but ultimately they are all down to covid.
Bounceback loans from the government meant that businesses were not needing to take out business finance from banks. They were also using bounceback loans to pay off more expensive bank loans.
Savings. Similar to the above, but on an individual front, people were not spending as much money. This meant they were able to put money back into their bank account or pay off loans and overdrafts.
Both of these things meant banks had more money in their accounts. As banks were paying interest of around 0.1% on the vast majority of this money, lending that out on mortgages at 1% still meant a 10 fold profit before costs.
It was not all down to Covid of course. Two other major factors were Employment levels, market confidence and the government offering banks cheap money.
Lets start with the easier of the 3 (albeit maybe the lengthiest), Market confidence. The only way I can think to explain this is that it has been the busiest period for the last 10-15 years. Lockdown has made the whole country reassess what is important to them, but it has happened to everyone at the same time.
You have people who moved to other cities who maybe felt isolated who now want to be closer to family. Then you have people in flats/apartments who maybe wanted a garden, people in smaller homes who wanted bigger homes. Younger people who maybe being stuck in with parents who wanted to get out – everyone had their own reasons but it to some extent artificially increased the market – combined with the stamp duty holiday, the confidence in the mortgage market has been very positive.
Employment, or more accurately unemployment was expected to hit rates of around 10% during the peak. However, as furlough ended and the country returned to normal. Unemployment rates did not hit 10% and seem like they will level off at around 4-5% by the end of the year. This is another positive and also plays into the market confidence, with high employment rates, that also helps market confidence.
The Government offering banks cheap money is an obvious one, if the banks are getting cheap money it artificially helps to reduce rates on mortgage/savings products.
What about the future of interest rates?
This was the part that surprised me the most.
I think everyone expects mortgage interest rates to rise in the future. This is down to a few reasons:
The country is getting back to normal now, this means people are spending money again. Savings will start to drop and this will take money out of the savings accounts. The same goes for businesses, some will need more finance to get back up and running again and combined with the bounceback loan repayments starting, this will take savings away from business accounts.
The governments cheap money to banks has stopped, this combined with the above will mean that the cost to banks of obtaining money to lend out will increase.
The bit that I found surprising however was how much they expect interest rates to rise… They are only expecting a 1% rise over the next 5 years, which is around 0.2% a year. Although I think it may be a little more in the first year and then lower in the subsequent years.