Due to the recent recession, there’s a glut in the economy. Those selling houses increase as the people purchasing homes lag behind them in numbers. This makes the price of the houses for sell drop. At this writing, the prices dropped an average of 1.7 percent this month alone. This also means banks don’t sell as many fixed mortgages as they did when housing sold rapidly. When you add the lower rate for fixed mortgages to the decrease in prices last month it spells bargains for home shoppers.
However, bargains on homes aren’t the only benefits homebuyers receive. The financial market conditions make it the perfect time to secure fixed mortgages. Fixed mortgages are now bargain priced for homebuyer for two reasons. The lending rate from the Bank of England, the entity that loans the money to the banks, is at 0.5 percent, which translates to lower rates for you on fixed rate mortgages.
Besides the interbank lending rate being lower, banks have a huge profit margin on fixed mortgages and are now in a war to get as many fixed rate mortgages as possible. In order to get the fixed mortgages, they’re lowering rates and still making a tidy profit in the process. The profit margin for banks on fixed mortgages is higher than it has historically been.
When you consider the profitability for fixed mortgages was 1.28 percent just two years ago and today, fixed mortgages have an average margin of 3.29 percent, you can see why the banks can start an interest rate war and slash some of the rates. They’ll still make record returns and attract more business in the process of lowering the fixed mortgage rates. The lending institutions find it a win/win situation to lower rates and secure more fixed mortgages.
Will this wonderland for homebuyers continue? The answer is no. Based on historic events, both the rates on fixed mortgages and lower housing prices will disappear. According to historical data, right after a recession, people begin to purchase items they require, including houses and the interest rate for fixed mortgages increase. During the period of recession, everyone waits so they can either get the best bargain or insure job safety.
At the first indication of recession end, the smart shopper will note the levelling of home prices. He knows the market bottomed out and now rushes in to buy. It takes a little longer for others to catch on to the fact that prices are going up and it’s time to buy. Soon, instead of a buyers market, the house market becomes a sellers market and everyone wants fixed rate mortgages.
The same scenario that occurs in the housing market occurs in all retail sectors. The number of deep discount sales decrease as the bargain hunter rushes out to snatch his prize before the price increases. Soon, prices increase because there’s more demand than supply. This causes prices to increase even more and is the beginning of inflation. Inflation dramatically affects the market for fixed mortgages.
The government notes the higher rate of inflation and lowers it by increasing interest rates. The Bank of England no longer charges lending institutions 0.5 percent but a higher amount. That higher amount reflects in the increased rate the banks charge for fixed rate mortgages and adjustable rate mortgages. Both of these mortgages increase in cost.
The forecast can be scary. Some predictions say that the interest rate on fixed rate mortgages could increase as much as 8 percent over the next two years. Others predict an increase in fixed mortgages but suggest that it won’t climb more than 1.5 percent for fixed mortgages and adjustable mortgages over the next year and a quarter because of a soft economy and slow economic growth.
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