BoE 5% - why are mortgage rates still so high?

ncooper1974

Ok, so the base rate is 5%.
i know we're in a credit crunch, and i know all about the sub prime market, but i'm looking to borrow £350k against a house valued at 500k and I dont understand why the cheapest deal i can see is almost 6%?!?

I know the housing market is in a decline, but i'm buying for the future - I plan to stay there for 7+ years and make it a family home - so not too worried if the 'value' of the house drops.

the only thing currently stopping me from moving is the actual rates being offered, rather than the actual fear of a HPC.
anyone else in the same situation?

_Andy_

It's mainly because (in essence) the rates lenders borrow money at is higher than 5%.

luckyfool

e.g. Halifax just sold a £500 million securitisation of its mortgages to raise funds. These were apparently Prime (i.e. low risk) and at average loan to values of about 61% (i.e. very very low risk), and investors demanded an interest rate of 0.85% over the 3 month libor. 3 Month Libor as of last Thursday was 5.85%, meaning Halifax, selling very low risk low ltv mortgages had to pay investors 6.7% per annum interest to take them off their hands and raise funds.

Hence, why mortgages are so expensive just now.

poppy10_2

Plus the banks have to price in the increased risk they are taking by lending in the current climate. They have made too many foolish loans over the past few years, and are at risk of making major losses, so they have to claw some of that back.

ManAtHome

Meanwhile... Broon-Troosers, Badger, and That-Bird continue to believe the BoE rate affects loan rates and not the value of the quid. (worried, you should be...).

ncooper1974

Thanks to all your reply guys.
Can anyone seen the mortgage rates dropping in the near future?

at the moment, the thing thats stopping me buying a home is the cost of borrowing, rather than the threat of a HPC.

Mr_helpful

ncooper1974 wrote: »

Thanks to all your reply guys.
Can anyone seen the mortgage rates dropping in the near future?

at the moment, the thing thats stopping me buying a home is the cost of borrowing, rather than the threat of a HPC.

No I cant see rates dropping at least not on inflation grounds. I think they will rise in fact. Some of us can remember when they were 15% so in reality they are still cheap.

mystic_trev

ncooper1974 wrote: »

Thanks to all your reply guys.
Can anyone seen the mortgage rates dropping in the near future?

It looks like some of the Banks may have been telling 'porkies' in order to keep LIBOR artificially low. Higher Interest rates?

http://www.bloomberg.com/apps/news?pid=20601087&sid=aAA11bsMpVD4&refer=home

SpendSpendSkint

Hi, registered on MSE in an effort to pick up some freebies and tips on stuff but thought I would use my first post in this thread as I have some 'exposure' to this area.

I basically work at a financial institution where I have direct contact with the UK mortgage lenders on a daily basis.

I just wanted echo the opinions of some of the others on here with regards the costs to the lenders. If you consider that currently you can pick up a two year fixed rate mortgage with a rate around 5.80%-6% the current 'hedge' rate for that lender on that mortgage is round 5.90%. With the current fear of credit this leaves them in the situation of having vey little margin built in.

I am current in the situation of approaching the end of my current mortgage deal in November so nobody wants to see the rates lower more than I do but for the time being I agree it doesn't look likely.

I though disagree with one thing - I do think the BoE will cut rates once more this year maybe around last quarter

LittleMissAspie

Mortgage rates are always a little above the base rate I thought?

blured

The banks have essentially been able to lend money with no risk in recent years through being able to bundle the mortgages up into securities -MBS - and selling them on to investors - usually hedgefunds - who often purchased them with borrowed money from Japan - known as the Yen carry trade.

As there has been no risk to the bank - they just get big commission through fee for mortagage and then through selling on, this encouraged them to lend at increasingly risky multiples as they were in a no lose situation. The problem now is that the securites market is completely shot and MBS are about worthless - the banks can no longer sell on the risk. This means higher interest rates as they now have to again price in the risk of default, higher depsoits and lower lending multiples.

This will not change in the near future, if ever. I think it is unlikely we will see a return to the risk free lending practices of the last 5 years. In times to come it will be seen as a blip - the trouble is people expect it to be the norm now...

Historic lending multiples have always been between 3 and 5 times average earnings and that is what it will revert to.

In general it is worth remembering that a house is only worth what the banks are prepared to lend on it.

Good luck with your search.