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The butterfly effect for mortgage rates – Mike Jones

by: Mike Jones
  • 25/11/2014
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The butterfly effect for mortgage rates – Mike Jones
The butterfly effect is the popular metaphor for how a small change in one set of conditions can have significant impact later on in another set of conditions. The theory being that the flap of a butterfly's wings in Brazil could eventually set off a tornado in Texas.

Maybe not that credible, but it must add even a tiny bit to the initial conditions which eventually affect where and when the tornado strikes. It remains an interesting hypothesis and one which is frequently cited in relation to business.

A recent example of this is the recent slew of weaker economic data coming out of Europe which indicates that weaker and patchy growth is likely for many members of the EU in 2015. While the UK is predicted to continue with above average economic growth next year, as mainland Europe is our largest trading partner, its problems have dragged the outlook for the UK down from what it might have been.

This in turn has seen seven out of nine Monetary Policy Committee members vote against a rate rise last month, acknowledging that the “further downside news in the euro-area had increased the risks to the durability of the UK expansion”.

As a result the imminent interest rate being predicted for Q1 2015 is now expected to have been pushed back to Q3 or maybe later.

As this is now front page news it means that many more borrowers and first-time buyers become more aware of how mortgage interest rates are linked to global economic factors. They have seen how this can cause them to come down and they see how they will also cause them to eventually begin to increase. As such, all the talk recently has been of when, how fast and how high interest rates will eventually rise.

The upshot of all this is that a negative economic outlook for Europe has lowered the cost of interest-rate swaps and can even be said to have caused the upswing in demand for fixed-rate mortgages in the UK.

Even with the removal of the immediate impetus of an interest rate hike we are still seeing a surge in demand for fixed rate mortgages, as lenders have responded with some extremely competitive fixed rate deals.

Prompted by global events, borrowers may see headline mortgage rates and want to fix now to protect themselves from higher repayments further down the line. However, it falls to brokers to ensure that clients are applying for and taking out the best products for them. If enough borrowers are tempted to choose to re-fix away from SVR, then we could look back at this as when the butterfly beat its wings.

Mike Jones is director of intermediaries at Lloyds Banking Group

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