Question about the disparity between BoE base rate, and Banks mortgage lending rates.

gerlewis

Question about the alignment (or disparity) between BoE base rate, and Banks mortgage lending rates.

At the moment the base rate is 0.5 but banks wont do a mortgage for much under 4%.

If the base rate was to rise to say 5% would there likely be a convergence between this and mortgage rates, or would mortgage rates be around 9-10%?

can we look to history? or is it anyones guess?

Thanks, Geraint


ps the reason I ask is I am moving up the property ladder (slightly), and am concerned about interest rates over the medium term.

Thrugelmir

Banks fund mortgages in different ways. Retail deposits (customer current accounts and savings), Wholesale Funding (companies, corporations, insurance companies, pension funds etc) and inter bank lending (swaps). The cost of a mortgage product is determined by the cost of raising the money to the bank. Not by the BOE base rate.

opinions4u

Long term, typical mortgage rates have been 1%-3% above BofE rate.

The Credit Crunch has moved the goalposts and, as you rightly point out, the gap is outside the typcial range.

Future wise, who knows? Supply of mortgage funds is low which pushes the price up. If that remains the same then you'd expect the current price differentials to remain high.

For what it's worth, all we can do is speculate. During my 22 years of debt I have had mortgage rates between 0.5% and 15.4%.

Plan for the worst is my advice. If the world remains kind you'll have a nice cushion of cash!

gerlewis

Thanks both

Moneyadvisor

Text book stuff here. When the banks are short of capitial the central bank reduces its rate and the margins rise hence what you are seeing now. As the banks recapitialise the base rate rises and the margins come down. This is the theroy. We are however in a new world of finance and its anyones guess but I will go with the text book theory.
Heres hoping.