Why are mortgage rates so high?

Thrugelmir

dunstonh wrote: »

There is going to be a generation of people that think this is the norm. They are in for a shock when rates return closer to the long term average of 7%.

And wage inflation no longer reduces the burden of actually repaying the debt. 25 years is a prison sentence. Which for many will be the healthiest times of their lives.

BillJones

xpi0t0s wrote: »

Current base rate: 0.5%. My mortgage: 4%. Best I can do at MoneySupermarket: 3.5%. This is eight and seven times the current base rate respectively, or base rate+3/3.5%. Used to be you could get mortgages at base+0.5%.

So my current mortgage costs me £550/month at 4%, but the bank only has to pay 1 eighth of that, i.e. £70/month.

What happened to the free market? Why aren't there any banks out there doing mortgages for base+1% or less? They'd be swamped for one thing.

OK, first point, no, banks don't borrow at the base rate.

Secondly, no, even if they did, the base rate is not expected to stay low for the life of your deal.

Third point, some customers default delay, or generally fall delinquent. The interest rate reflects the costs caused by this.

Fourth point, after the above, the bank is in this to make a profit. They are not a charity.

xpi0t0s

Thanks for the great answers. Clearly I've got some gaps in my misunderstanding ;-)
However they only raise further questions. There *was* a time you could get mortgages for base rate plus 0.5%, some places were even offering base rate minus 0.5% albeit for a short time.

>What makes you think that banks are borrowing at base rate?
Fair enough. Nothing, I suppose. What rate do they borrow at?

>Plus they want to make a profit too
True, but back then they also wanted to make a profit. If profit is the reason you can't get base+0.5 now, then why could I get base+0.5 then?

>Also last time I checked banks are businesses!
Yes, and back then they were also businesses.

>There's no magic money tree. As many believe. The money you borrow is somebody elses savings.
>How long do you think a bank would survive lending people money at 1% whilst paying savers or investors (via the money markets) 3%?
No need to patronise me. I don't remember saying anything that implied I thought there was. There was no magic money tree when I *could* get base+0.5. At that time the money I borrowed was also someone else's savings. What's changed? Is there more money saved in savings than borrowed in mortgages? If so then that creates space for lower interest mortgages. If not then there's a big problem, or there must be a secondary source for mortgage funds.

>Secondly, no, even if they did, the base rate is not expected to stay low for the life of your deal.
I wasn't asking about rates over the lifetime of my deal. I was asking why with a base rate of 0.5% my mortgage is at 4% which is base+3.5% or base*8 and comparing this with the time when you could get base+0.5%, which would translate into a *current* (i.e. as of today) rate of 1%.

>Third point, some customers default delay, or generally fall delinquent. The interest rate reflects the costs caused by this.
True, but this isn't new. It happened back then too. This doesn't explain the difference between now and then.

>Fourth point, after the above, the bank is in this to make a profit. They are not a charity.
Again, not new. Also happened when base+0.5 was available.

BillJones

xpi0t0s wrote: »

Fair enough. Nothing, I suppose. What rate do they borrow at?

All sorts of different rates, based on their credit rating, and how long they borrow for (among other things).

One bank that famously lent money long-term and borrowed short-term (where funds were cheaper) was Northern Rock.

This was, unfortunately, a recipe for disaster, as wen they found that they could no longer borrow, they were effectively bankrupt.

As to your question on delinquency and default, it would seem that banks a few years back were lending too easily, with too little thought to the probability of default. It lead to trouble. They (hopefully) now know that they need to be a bit more careful.

dunstonh

There *was* a time you could get mortgages for base rate plus 0.5%, some places were even offering base rate minus 0.5% albeit for a short time.

Correct. However, when rates are higher, the margins in percentages can be lower.

Savers are getting more than they would as a margin over base rate than they would if interest rates were higher.

SandC

xpi0t0s, when banks were offering mortgages at base rate +0.5% the base rates were not as low. The low base rates we've had for the past couple of years are historically unheard of.

This is a Bank of England doc which is interesting:
http://www.bankofengland.co.uk/statistics/Documents/rates/baserate.pdf

Put simply, if they cannot make any money from the existing base rate then they have to increase their own rates.

Thrugelmir

xpi0t0s wrote: »

However they only raise further questions. There *was* a time you could get mortgages for base rate plus 0.5%, some places were even offering base rate minus 0.5% albeit for a short time.

Combination of factors. BOE base rate was over 5% at the time. Also banks were bundling up mortgages and selling them to investors. Using the fractional reserve banking model, banks can create money.

In the mid nineties to 2008. Regulation became more and more relaxed. As the view was that banks could hold less and less capital. The concept first originated in the USA. Also was a mainstay of the the economic thinking of Balls and Brown. Hence this is where the infamous no more "Boom and Bust" saying came from.

As we know now. US banks were bundling up subprime debt and selling it as prime. In the UK, Northern Rock, HBOS and Bradford and Bingley were taking a high risk strategy with regards to their lending books (in HBOS's case commercial property lending as well as residential).

Far more to the tale than I've written. Needless to say the world has changed 2008. With more change to come as banks continue to deleverage their balance sheets.

Jackie132

You should search for another alternative or bank. There are also some other bank available that are providing less than what you are going to have mortgages from this Bank. Besides, there are no. of sites running online offering mortgages in just 2 to 3%.

Sophie-1

Your mortgage rate is normal it is the base rate that is being kept artificially low by the government (ops! I meant bank of England)

Mortgage_Mark_2

Government -> Treasury -> BofE.

Same thing really...