The current volatility in stock markets has returned with a thud this week.
The issues remain the same – weak economic growth in the US and a sovereign debt crisis in the eurozone. The question is – does this affect mortgage rates in the UK and, if so, how?
Closest to home is the European sovereign debt crisis, which is actually a banking crisis.
Instead of subprime loans, the banks in Europe own sub-prime government debt. If the crisis does end up with a large and unplanned default by one or more European countries, then we could see credit markets freeze up as happened in 2008.
Indeed, short-term lending rates to the US subsidiaries of European banks are already on the rise as concerns over their financial strength deepen.
Whilst there are differences to the 2008 crisis, we could end up seeing a lending slowdown as banks come under pressure.
The result would be a tightening of lending rules, which could mean a return to the scenarios seen in 2008 and 2009 when banks would offer only attractive rates to the those with good loan to value, so 60% or better.
Of course, a full blown collapse of the eurozone would not be in anyone’s interest and is the doomsday scenario. More likely is that the politicians will find a way to continue to muddle through.
The other pressure on global stock markets is growth or, more specifically, the lack of it.
Growth in the eurozone and Germany was marginal and early indicators in the US suggest growth there is weakening.
As such, we have seen the US announce it will not raise interest rates until 2013 at the earliest and, as economic growth in the UK continues to remain subdued, it is looking less and less likely the Bank of England will raise rates any time soon.
Indeed, consensus views now suggest rates will remain at all-time lows until at least 2013.
This should help underpin low mortgage rates for the next 18 months.
Of course, should the economy slip into recession, we may start to see a rise in bad debts, which could impact on mortgage lenders’ willingness to finance first-time buyers and interest rates at the riskier end of the market could rise.
At the moment, there is a lot of uncertainty in the markets as the volatility demonstrates, but all in all the recovery will remain weak and recession should be avoided.
There is little ability for borrowers to absorb higher mortgage rates, which may help to keep them low for the next few years.
Adrian Lowcock is senior investment adviser at Bestinvest
