Nixon Williams

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'Mortgage war’ between lenders benefitting contractors, but negative rates unlikely

Contractors are unlikely to experience negative interest rates. However, they are benefitting from an unprecedented range of cheap fixed-rate mortgages that are the result of a free-for-all between lenders seeking to meet lending targets before the General Election.

“We’re unlikely to see Swiss or eurozone-style negative interest rates because the UK’s economy is in a very different place,” explains Taj Kang, mortgages expert at CMME.

“However, what we are seeing is lenders fiercely competing with record-low fixed-interest offers to meet their internal lending targets ahead of the General Election. Contractors have an unprecedented opportunity to pick up fantastic long-term low interest deals.”

The eurozone’s economic challenges differ from the UK’s

According to Kang, whilst the experiences of the Swiss and European central banks in setting negative interest rates might sound exciting to contractors, the Bank of England is unlikely to go down the same route.

“The European Central Bank (ECB) set a negative interest rate last summer,” he says. “That means it costs Europe’s banks money to place funds on deposit with the ECB. The negative interest rate incentivises lenders to put that money to good use by lending to eurozone businesses in an attempt to stimulate the economy and lift it out of deflation.”

The situation in the eurozone is completely different from the UK. Many eurozone economies are struggling to grow, so the threat of deflation is very real. In contrast, the UK economy is growing and businesses and households are starting to invest and spend.

The UK’s anti-inflationary environment is temporary

Kang believes that it is important to consider what record low inflation means for the UK: “Members of the Bank of England’s monetary policy committee started talking about negative interest rates as long as two years ago, but at the time it was decided that negative rates were not a good idea and to see how the economy performed.

“Bank of England governor Mark Carney sees negative interest rates as an ‘extreme and radical measure for the UK’, and a lot of economists would agree. It is believed that the factors that have led to a near-zero rate of inflation, such as falling oil and commodity prices, are temporary.

“It is possible that the rates may go down another 25 basis points to become quarter of one per cent, but no further. The Bank of England is more likely to go down the quantitative easing route again to stimulate demand, rather than to set negative interest rates.”

UK lenders in mortgage price war

Two other interrelated factors are at play that will have a greater impact on the sort of mortgage deals that contractors could benefit from in the coming months: the General Election and lenders’ targets.

Kang explains: “Lenders are under pressure to meet their internal lending targets, which are becoming more demanding as the UK financial sector continues to recover. This has led to a mortgage price war, resulting in hugely competitive deals for contractors. Long-term fixed-rate deals are at record low interest rates. This is an opportunity contractors should not miss.”

Kang notes that long-term fixed rates have fallen through the floor with five-year and ten-year fixed-rate deals at the lowest they have ever been.

The General Election is causing uncertainty

The deal frenzy is so intense because of the second factor – the imminent General Election due on 7 May 2015. Kang continues: “Where the election has an impact is that it creates uncertainty. Right now, no one can say who will form the next government and there is every likelihood that we will see a hung parliament.

“As a result of this uncertainty, lenders are desperate to get as much money as possible lent before the election, which is why we are seeing such intense competition and such good deals for contractors.

“Post-election, the banks are likely to take their foot off the pedal and start focusing on margin rather than volume. The likely result will be for lenders to start pricing back upwards, and those fantastic deals for contractors will no longer be available.”

Kang concludes: “Based on the current mortgage environment, I’d urge any contractors considering a mortgage or remortgaging to do it as soon as possible.

“Of course we can’t be sure of the direction the market will take until the election result is known, but whatever happens on 7 May we’re unlikely to see such attractive deals again for a long time, if ever.”

Published: 31 March 2015

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