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Mortgage Interest Rates

Historical Interest rates & Government Macro Economics – the role of Government is critical in the cost of mortgages and the availability of money supply into the property market….Mortgage Interest rates have always been of concern to anyone borrowing money on a mortgage to purchase a house. The UK economy has always been seen by the outside world as being developed and stable and apart from the odd blip, sterling our currency has been viewed as a safe bet for foreign investors. If we look back at interest rates over the last 25 years, we will see a number of fluctuations, some have precipitated fairly dramatic changes in the price of homes. Younger house purchasers may be concerned by the above table of interest rates, UK mortgages today are still relatively cheap and of course should borrowing rates increase to some of the levels seen above, then property prices would not be sustainable.. However, government macro economics, very much focuses on interest rates and both them and the bank of England know that interest rates are key to the continued growth of our economy.

Economic Stability – The use of interest rates to effect the economy is an old established practice and forms a core part of our governments macro economic objectives. These include low inflation, increasing the sustainable growth rate, maximum employment and equilibrium in the balance of payments. Whilst it is never possible to obtain full employment, mainly because of the movement of workers etc, economists believe that less than 3% unemployment can be considered full employment. Unemployment has various social and economic costs, it causes a loss of self esteem thus leading to problems with finding reemployment, money has to be found to meet benefits which in turn can lead to an increase in borrowing, which then puts pressure on inflation. Whilst low interest rates can help to keep inflation in check, it can in turn increase consumer spending and thus the bank of England monetary committee now keep a tight reign on matters to make sure that interest rates are kept at the appropriate levels. This is a complex task and a nine man team take two days each month to discuss this matter. It is an enormously complex issue, the committee realise that inflation must be kept in check but interest rates must be kept at a reasonable level so as not to deter investment in business which of course helps to create employment.

Impact of Interest Rate Changes-As well as the effect on mortgage rates, raising bank lending rates can have the following economic effects

  • The cost of borrowing is increased, this effects not only mortgage rates, by personal loans, credit card repayments and all other non fixed rate loans. If the cost of borrowing is increased, then consumer spending falls as people have less disposable income. Less money can be saved as a consequence even though interest rates for savers become more attractive.
  • Interest rates of variable rate mortgages increases. This is most peoples biggest monthly outlay. A small 0.25% rate increase will increase a £100,000 mortgage by £30.00 per month.
  • Higher interest rates encourage saving although, there is less money to save. This scenario suits persons who already have savings.
  • Sterling our currency gains in popularity on the money markets. Currencies are traded in pairs and against the euro and dollar, sterling will increase in value making our exports less competitive but making imports cheaper.
  • Higher interest rates leads to higher repayments on government debt, this could lead to higher future interest payments as the government seeks to repay loans.
  • Confidence in the economy is reduced by increases in interest rates, it discourages investment in new business ventures and makes consumers less willing to part with disposable income.

The UK Property Market-In 2007, many people fear there could be another property price crash in the uk property market, as experienced in the late 1980s boom bust scenario. The 80s property bubble was caused by a number of factors, debt levels were standing at a low level following the recession earlier in the decade and real house prices were low as well. This set the scene for rises in both, speculators moved in to the market and property became popular, the conservative government actively set out to make us a nation of homeowners. The cost of borrowing money became easier, wealth to income ratios grew and banks and building societies permitted higher gearing on, loans and mortgages. Then drop in interest rates in 1987 and the introduction of the poll tax gave more impetus to the market and the very appreciation of increases led to higher expectation of more increases to come. The bust in the late 80s early 90s came as a reversal of the above and a new term “ negative equity” came in to existence. Interest rates rose, making the cost of borrowing on a mortgage higher, many people were already stretched to the limit and many houses were repossessed as people struggled to keep up with repayments.. Growth in income and property demand weakened as debt levels and house prices were at an all time high. At the same time banks and building societies started to tighten up on lending criteria and even a drop in interest rates failed to re start the housing market. The government do not wish to repeat this scenario, once confidence in markets has been dampened, it can take quite a while to return and the economy could quite easily be tipped in to recession. Government macro economics, very much focus on interest rates as they realise that they are the key to the economy. No one wants a repeat of the boom bust scenario as detailed above and now that base rates are firmly under the control of the bank of England w should hope that an key part of the economy is in fairly safe hands.

The Role of the Bank of England Monetary Committee –the cost of mortgages is dictated by a committee of 9 economic advisors hoping to meet the UK Government inflation target…..

Introduction – Every homeowner in the United Kingdom with a mortgage has a vested interest in decisions made by the bank of England monetary committee. When Tony Blair and his new labour government first came to power in 1997, the first act of the incoming chancellor, Gordon Brown was to hand over control of setting interest rates to the Bank of England. Previous governments had often been criticized for raising and lowering interest rates to gain political advantage, new labour promised to’ hit the ground running” and the handing over of interest rate control with it’s direct relationship with mortgage borrowing rates was seen as a bold step. In 1998 the Bank of England act was passed through parliament which gave the bank the ability to set interest rates, however in times of national emergency, the government still has the ability to override the bank if it feels necessary.

Bank of England MPC Independence -The bank of England ( BOE) monetary committee overseas the raising and lowering of interest rates to keep in line with the banks core objectives. They are directly answerable to the chancellor of the exchequer for keeping the economy in good shape and with particular regard to inflation have to report if the rate falls outside set parameters. If the preset limits are exceeded, the governor of the bank of England must write an open letter to the chancellor explaining the position, in the last ten years this situation has only arisen once. So what are the core objectives of the Banks monetary committee, in essence they exist to help provide the country with monetary stability. Monetary stability means stable prices, this helps to deliver low inflation and confidence in our sterling currency both at home and abroad. Low inflation means stable interest rates which of course is good news for anyone with a homeowner loan or mortgage. The bank of England act on advise from the monetary committee regarding interest rates to help archive the governments inflation target which is currently 2%

The Monetary Policy Committee -The monetary policy committee are thus responsible for setting an interest rate that they believe will keep inflation in check. The monetary policy committee or MPC consists of nine members, five are employees of the bank of England with the remaining four all appointed by the chancellor. The committee is chaired by the Governor of the bank and the committee usually meets once a month for two days to discuss interest rates and matters of fiscal policy. Decisions are made by the committee on a one man, one vote basis. The decision to raise or lower interest rates is made at twelve noon on the second day of the meeting. The minutes of the meeting are made public on the Wednesday of the following week. Every quarter, the bank has to produce a report as to current market conditions and also supplies other information to broaden interest and knowledge of it’s monetary policy. There is usually much speculation leading up to the committee meetings, newspapers in particular are always speculating as to the direction of interest rates and the effect that this will have on mortgage holders. Whilst there is nothing directly homeowners can do to influence the change in interest rates, paying attention to speculation and reports of consumer spending can help help you to make an informed decision as to a suitable mortgage. Usually in the run up to an announcement by the committee, particularly when an increase is expected, the availability of fixed rate mortgage deals tend to disappear, banks are building societies are notorious for trying to factor in interest rate rises to their mortgage product range, prior to any announcement being made.

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