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Rates could drop 1% by early 2011

by: Mortgage Solutions
  • 10/05/2010
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Average mortgage rates could fall from 4% to 3% by early next year, according to the Centre for Economics and Business Research.

It also said that sluggish GDP growth from 2011 to 2014 means Base Rate could average 0.5% over the next 18 months and will only rise slowly after that. The organisation forecasts that mortgage rates will drop by 100 basis points by early 2011 as money markets price in the effects of cuts in the budget deficit. It added that even if political uncertainty means Base Rate rises this year, they would only be temporary before dropping back down again.

Douglas McWilliams, chief executive at CEBR, said: “We think that the next rate increase (other than a temporary one to protect the pound given the hung parliament) could be as much as two years away and possibly more so. When the market realises this, the spreads on new mortgage rates will fall.”

But Ray Boulger, senior technical manager at John Charcol, thought the forecasted rate drop was too great: “If they had said mortgage rates will be a little lower next year, fine, but 1% just doesn’t stack up – Base Rate hasn’t got anywhere to fall and the spread between the cost of money and mortgage pricing has already edged down a bit.

“There is every probability that Base Rate will remain at 0.5% until the first quarter of next year – the economy needs it to remain low to restore activity.”

In its Quarterly Economic Report broker trade body, The Association of Mortgage Intermediaries, agreed that interest rates needed to remain low for a prolonged period to support households and companies while taxes are high and public spending is cut to beat the deficit.

But director Robert Sinclair warned it was possible new mortgage lending rates could actually rise.

“All parties agree that Base Rate needs to remain low and I think people on default rates are in a fairly safe place. The issue sits with those on LIBOR-linked loans or who might be in the market for a new mortgage. Uncertainty in the markets is driving LIBOR rates up, and while swap rates have not risen immediately as a result of the Election, I think there is a risk they will begin to further down the line.”

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