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UK Interest Rate Predictions & Property Market Forecast
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Interest Rate Predictions

Interest rates, the credit crunch and how your mortgage interest rate is predicted

 

The Bank of England sets interest rates to keep inflation low. The aim is to maintain a stable financial situation. Interest rates influence saving and spending in the economy and also the price we pay for goods and services. These interest rates also affect mortgage interest rate predictions.

 

With the credit crunch in full swing the Bank of England has lowered the base interest rate to 0.5% - the lowest rate ever in its 315 year history. Interest rates have been lowered 5 successive times since October 2008 in a bid to stabalise the economy and encourage consumer borrowing and spending.

 

Bank of England's Official Base Rate since 1951

 

It used to be relatively easy to make a mortgage interest rate prediction. However due to economic and political factors it has become much more complicated.

 

 

Mortgages

It was fairly straightforward. A mortgage interest rate prediction took into account the amount of money the banks had to lend and the number of borrowers applying for mortgages

 

Until recent years it was quite difficult to get a mortgage. Buyers had to prove themselves by saving a deposit over several years to show their bank that they were capable of repaying a mortgage. The mortgage market has grown over the last twenty or thirty years and more and more people expect to own their own home.

 

Borrowers with fairly low incomes have been offered 100% mortgages increasing the likelihood of default. Any increased risk will make mortgage rate predictions rise. If house values fall the risk to lenders increases and they will want to charge higher rates to compensate. Any reduction in the availability of credit will have an adverse effect.

 

 

Inflation

Inflation is another factor that affects the mortgage rate. Again this causes it to rise.

 

Inflation is a word used to describe a rise of average prices in the economy. It generally means that the value of money is falling. There is too much money available to purchase insufficient goods and services. Inflation can also be caused by an increase in the price of imported goods such as oil or an increase in the cost of commodities such as gas and electricity.

 

Any upward pressure will have to be taken into account when predicting mortgage rates.

 

 

Deflation

The flip side to inflation is deflation.

 

Deflation occurs when the annual interest rate falls below 0% resulting in an increase in the value of money. Deflation is not a temporary fall in prices but a continuing fall causing a fall in the demand for services and goods. People are wary of spending in the hope that prices will fall further. This can result in a very rapid economic slowdown.

 

House prices will also start to fall along with mortgage - rates. Unemployment rises as the demand for goods and services slows down. Companies go out of business. Investors become nervous about buying any investments linked to mortgages and lending dries up.

 

Deflation discourages spending even though the cost of goods and services are reduced. If consumers don't buy businesses don't make a profit. Employees can't be paid and are made redundant. Businesses close down.

 

Banks are too nervous to lend money to each other and us. They increase interest rates to cover the risk

 

 

Recession

The economy is said to be in recession after two successive quarters of negative economic growth. That is six months of continuing deflation.

 

There is a general downturn right across the economy from the banking industry, the High Street, manufacturing and house building.

 

 

Credit Crunch

A credit crunch is a reduction in the availability of credit or loans. This is usually independent of a rise in the interest rates. This means expensive mortgages and credit cards. As the situation worsens house prices fall and we have negative equity and repossessions.

 

There is a general downturn right across the economy from the banking industry, the High Street, manufacturing and house building.

 

 

Government intervention

Banks and businesses seek financial aid from the Government. A freeze on VAT could possibly encourage more spending. The Government needs to take action to reduce the freeze on credit. Credit and lending should be made more available.

 

When the usual methods of controlling the economy, such as raising or cutting interest rates, fail the Bank of England may have little option but to try more unusual methods: Quantitive easing. In other words simply printing more money to boost the supply of cash in the system to reverse the effects of deflation.

 

Extra cash in the system should hopefully encourage banks to start lending again. No one can accurately predict the end of a recession/deflation but to make accurate interest rate predictions we do need a stable economy.

 

 

 

 

Value of Property  
£
(eg 135000) 
Value of Mortgage
£
(eg 85000) 
Type of Mortgage