Ground breaking movements in interest rates continue – in both variable and fixed rates. The latest news of course was the base rate reduction to a record low of 0.25% last week. However, swap rates, and therefore fixed rates are also at record lows – the “clean” five year swap rate is now a staggering 0.48% – that’s less than base rate has been for the last few years!!
So how might this affect savers, borrowers and property investors?
For savers, as rates fall to these ultra low levels, they might be encouraged to search elsewhere for yield (base rate has just halved!). However, if an institution loses savers by reducing their savings rate, then they will have little alternative but to maintain their savings rates so that they keep sufficient funds to lend out. Further, lenders will be reluctant to reduce margins by reducing their mortgage rates whilst they have to maintain savings rates. We therefore expect little further change in savings rates.
Borrowers
1. Base rate linked loans & mortgages – there is an immediate drop of 0.25% per annum and their payments will reduce.
2. Loans lenders “standard variable rate” (SVR) – we expect little change in these rates as lenders will be reluctant to reduce their margins – for the reasons as set out above;
3. Existing Loan on fixed rates; No change until such time as the fixed rate expires;
4. New Loans on fixed rates; The exciting news here is the substantial drop in fixed rates alluded to above means that fixed rate lending has seen the biggest impacts in the last 6 months, and rates are now much lower than even a year ago. A 5 year “all in” commercial fixed rate of under 3% is a possibility!
5. Property Investors – they will see real profits going up, as represented by the difference in interest rates paid and rents received. Will this help to push up prices of residential and commercial investment property?
6. All borrowers – the reduction in rates means that less income is required to service a loan, and more money can be borrowed for a given income or profit– particular impacts being seen in property investment when fixed rates are used.
Here at “Key” we keep a close eye on the market place to ensure we give the best advice to our clients. If yourself or your clients would like to discuss the above or any aspect of commercial and property investment/development finance, we would be delighted to hear from you.