Many people will be surprised to learn that UK base rates are expected to fall in the short term. The Bank of England is apparently on the verge of announcing a further reduction which would make finance even cheaper in the UK. However, will this have a material impact on the UK mortgage market?
Competition is intense
We know that competition in the UK mortgage market is intense at this moment in time. There is a chance this competition may reduce slightly in the short to medium term as more buyers and sellers come out of the woodwork in light of recent progress in Brexit talks. However, if we see a 0.25% reduction in UK base rates in the short term, will this really impact mortgage rates?
The likelihood is that some mortgage providers may well trim their headline rates but to all intents and purposes UK mortgage rates must surely be at or near the bottom of their range? If we look towards the European Central Bank, with base rates currently 0%, this does certainly encourage mortgage lenders to be competitive. However, there are a number of other issues to take into consideration.
Savings rates
In reality UK savings at rate this moment in time are negligible and a further reduction in UK base rates will obviously not assist any short-term recovery. The ability to lock in fixed term mortgage rates of less than 3% in tandem with a property purchase deposit must surely look more attractive in the longer term? Then there is the opportunity to lock in rental income which could be anywhere upwards of 4% and again compares favourably to savings rates.
We have seen a huge influx of institutional investment in the residential property market in Germany for example. The difference between savings rates, nil, and potential rental income, in excess of 4%, in effect makes this a no-brainer in the short term. The fact that it is pushing property prices in Germany higher and higher is something that the authorities will need to address in due course.
Confidence returning
It is safe to say there are signs that confidence is returning to the UK property market with London in particular showing renewed strength of late. The political gridlock we saw towards the end of 2019 has ended with Boris Johnson securing a significant majority in Parliament. Whether we like it or not, Brexit negotiations are moving forward and while there is still a long way to go, and no doubt more major upset, progress is being made. The UK is leaving the EU (official leaving date is the 31 January 2020) although the rest is still a little vague to say the least.
Summary
The main reason why UK base rates are set to fall further in the short term is as a consequence of some dire consumer sales figures of late. The high street is struggling, consumers are concerned about Brexit and even the potential to lend money at near record lows has not yet turned the heads of consumers. It will be interesting to see the comments associated with the expected reduction in UK base rates when the Bank of England finally makes the much expected announcement.
Will consumer confidence get a boost from a reduction in base rates? Is the UK really set to leave the European Union? Time will tell….