Plunging inflation and interest rate expectations have prompted banks to launch an explosion of mortgage deals fixed for 10 years at historically low rates.
Santander this morning launched its lowest-ever 10-year mortgage pegged at 3.44% until 2024, aimed at home buyers able to stump up a 40% deposit. The new mortgage, which the bank claims is the cheapest in the market, is the latest in a surge of 10-year deals from lenders cashing in on expectations that interest rates will stay low for longer.
Inflation fell to 1% in November, down from 1.2% in October, and the lowest in 12 years according to the Office for National Statistics. The fall sparked speculation among economists that the first rise in interest rates, anticipated some time in 2015, may now not happen until 2016.
Ultra-low money market rates are enabling banks and building societies to offer decade-long mortgage deals at prices not seen before. “The battle to keep mortgage borrowers on side has moved on from the popular two and five-year fixed rates to an explosion of 10-year deals, increasing from just 12 in November 2013 to 52 today,” said Sylvia Waycot of data providers Moneyfacts.
The Santander deal jumps ahead of a 3.45% rate from Woolwich, but mortgage expert Ray Boulger of John Charcol advised borrowers to wait for even better rates to emerge in the coming weeks. “The 10-year gilt is down from 2% to 1.71%, falling eight basis points this morning alone. We can now expect to see further cuts in five and ten-year mortgage rates.”
Gilts are government bonds, and the interest rate on them reflect where money markets expect the Bank of England base rate to be over the longer term. “We are going to see mortgage rates staying low for longer than people expected. This time last year most economic forecasters were saying they expected one or two base rate rises in 2014, and now the consensus is for a rise in the third quarter of 2015. But my guess is that this time next year we are going to be talking about the first interest rate rise in 2016.”
But if interest rates are unlikely to rise, possibly for two years or more, is there any point in borrowers taking out a fixed-rate mortgage? Boulger said: “You might end up paying 0.5% more for your mortgage, but a lot of people will be happy with that as it’s still good value and people want to be able to budget for the longer term.”
Even borrowers without much of a deposit are currently able to access historically low rates. “If you have just a 10% deposit, you should be able to find a two-year discount deal at 2.5%, and all the signs are that they may even get cheaper,” said Boulger.
