Update March 11th: For more info on the interest rate change due to coroanvirus go here.
Brexit and mortgages
What happens to mortgage rates after Brexit on January 31st – the date we're meant to leave the EU.
It's been a funny few months (ok, years) for the British economy, and while here at Mojo we'd never pretend to be economists, we do know about mortgage rates.
So, we got our adviser Nathan to answer some of the most common questions people ask him every day about Brexit and what will happen to mortgage rates.
How does Brexit affect mortgage rates?
Mortgage rates are basically interest rates. And all interest rates have some relationship to the Bank of England base rate. They may be directly related such as some tracker mortgages, sensitive to base rate changes such as variables, or just positioned relative to what the base rate is: fixed rates.
First up, why do interest rates change?
The Bank of England wants to get the British economy to a good place and uses its base rate as a sort of brake and accelerator pedal combo.
It wants to drive at a speed of 2% growth or 2% inflation, and if the economy is growing slower than that, it 'speeds up' the economy by cutting the base rate. The thinking behind this is that there's less incentive to save at low interest rates and more incentive to spend (especially banks' money) and spending is good for economic growth.
If we're going too fast and inflation goes much beyond 2%, then it increases the base rate to slow things down. Then the opposite is supposed to happen, it becomes 'more expensive' to spend and 'better value' to save.
And when we are talking about mortgage interest rates, it can become more expensive to pay back the money you borrowed.
So, will mortgage interest rates rise on January 31st then?
We don't think so.
As I said, mortgage rates are based off the Bank Rate, which is a stabiliser for the whole economy, the Bank of England's Monetary Policy Committee (more on them later) take a lot into account when deciding whether or not to change the base rate, such as:
- Current inflation, which just hit a 3-year low
- Wage growth
- Consumer spending, which was relatively low during the Christmas period
- Investment levels
- Employment levels
This is what the Monetary Policy Comittee (MPC) is currently thinking officially: In November 2019, they voted 7-2 to keep the Base rate at 0.75%. The outvoted 2 wanted to cut it to 0.5%, so if there is any change in mortgage rates, they are likely to go down, not up.
And this is their recent comments: Mark Carney, governor of the Bank of England, January 9th:
“With the relatively limited space to cut Bank Rate, if evidence builds that the weakness in activity could persist, risk management considerations would favour a relatively prompt response”
Gertjan Vlieghe, MPC member, January 12th:
“The decision to lower the base rate will be a close call.
“It doesn’t take much data to swing it one way or the other and the next few [MPC] meetings are absolutely live.
“I really need to see an imminent and significant improvement in the UK data to justify waiting a little bit longer.”
The January 30th vote decided to keep rates flat for now.
So, what about house prices then?
The Bank of England did warn that house prices could plummet. Rather scarily, a 30% drop was put forward. If you're a mortgage holder, then this could leave you in negative equity.
The comforting news is that this report came out in November 2018, and detailed the absolute worst-case, no-deal scenario.
Predictions are slightly more levelled these days.
A no-deal (more on that later) is still problematic, with credit rating agency Standard & Poor’s now predicting a 10.2% drop in house prices if we leave without a proper trade deal.
The Bank of England says it expects a deal will be sorted by November, and with that in mind, it looks to be business as usual for house prices.
CBRE's current forecasts for UK average house price growth look like this:
While Savills, predicts this outlook:
Finally, it may be worth knowing that since the EU referendum in 2016 and all the uncertainty that's lingered, the average house price in the UK has increased from £212,887 to £230,292 – a rise of 8.18%.
What happens to mortgage rates after the January 31st Brexit deadline?
Deadlines aren't exactly binding with Brexit.
Originally, the UK was set to leave the EU on March 29th, 2019 (a date in itself that was 2 years after Article 50 was invoked). Lots of withdrawal agreement rejections later, and we had an extended deadline until October 31st, 2019.
That came and passed, and EU leaders agreed our current deadline date of January 31, 2020.
What's different this time, is that following the election and the Conservative majority, the withdrawal bill has been passed, we have a deal, and nothing is stopping us leaving.
However, a trade deal is largely undefined and will be the focus of the transition period that concludes at the end of 2020.
So, nothing will happen to mortgage rates on January 31st that wouldn't have happened as a result of the Bank of England's MPC meeting anyway.
There's a chance if we don't come to some sort of trade arrangement by the end of the year, the more gloomy no-deal forecasts may start to become an issue once more.
What does Brexit mean for my mortgage?
The most likely change of the status quo for the next 12 months is a rate cut, it could happen in the next few days even.
IF that happens then mortgage rates MAY drop further – they're already at some of the lowest levels in history.
So, if you're on a variable, then your monthly payments may fall in the short term.
Should I remortgage to a variable rate due to Brexit then?
It's important to remember a mortgage term is for a fixed period of time, not just the next few months.
You should always look at your own personal circumstances before making any mortgage decisions. Of course, we can always talk you through various implications and what it means for your finances, but ultimately, it’s a bit of a gamble as to whether rates will fall further over the next 2, 3 5 or even 10 years.
So, fix while its low and avoid the Brexit uncertainty?
As I mentioned, right now mortgage rates are really low by historical standards.
Some recent data from conveyancer LMS shows that people are opting for fixed rates in a big way. In Q2, more than 9 out of 10 borrowers (96%) choose a fixed rate mortgage.
What else does Brexit mean for mortgages? What about mortgage prisoners?
It could be the end of the EU rule: The Mortgage Credit Directive and the interpretation of this rule that created thousands and thousands of mortgage prisoners.
You're a mortgage prisoner if you took out a mortgage prior to this directive (and the financial crash) and then when the time came for you to remortgage away from the SVR, you failed new, much stricter, lender criteria. You're a prisoner because you're basically being denied a new mortgage, even though you already had one, and being forced to pay thousands more as a result.
The FCA has already promised to help 30,000 people who are trapped, and 67 mainstream lenders have agreed to help borrowers who are on reversion rates switch to a new deal, but Brexit could also bring in a further rework of the lender market.