To say the outlook for the economy is uncertain would be putting it mildly. Unprecedented intervention on the part of several governments – in the form of massive bail outs for the beleaguered banks – have stimulated the economy, but at what future cost no one can agree. In the wake of these unusual events the current mortgage interest rate has fallen to – and remained at – its lowest level for many years. While this has given many a welcome relief from the burden of high interest mortgage payments, and increased demand for home loans, it also brings with it the specter of inflation and the fear that more hard times may be on the way.
For the new home buyer current mortgage interest rates are of immense interest, as a favorable rate could lead to significant savings on the cost of a loan. The rate may also dictate which type of mortgage is most appropriate. While the current home mortgage interest rate is low, or expected to decrease, it may make sense for a new home buyer to go for an adjustable rate or an interest only mortgage, which would leave some spending room for additions to the house, like living room furniture or a dining room table. While current home mortgage interest rates are high, or expected to increase, an existing home owner might decide a fixed rate second mortgage is a better option when considering the best second mortgage rates.
That the mortgage rates current trend is low is beyond doubt, but what is the current mortgage interest rate going to do in the future? The trouble is, no one – even the experts – can say for certain. There is widespread opinion that the current mortgage interest rate is artificially low and does not reflect the economic realities of the day, which are high unemployment combined with a huge amount of debt. Lenders face greater risks in these conditions and this should naturally drive up interest rates to compensate for them. There are too many influencing factors to make the current interest rate for mortgages that predictable however.
1. Investor Sentiment
Most of the money used to fund mortgage loans comes from the capital markets. Here, hundreds of different products – or instruments – are competing for investment. These will all have different potential risks and returns attached to them, and investors will base their decisions on these factors and their overall feeling on the health of the economy.
When demand for mortgages is high the current mortgage interest rate is also likely to be high, and this means a greater yield – or profit – for the investor. In these conditions investing in mortgage based securities is an attractive proposition.
The strength of the economy will also affect current mortgage interest rates because it affects the amount of risk involved to lenders. A strong economy means that lenders are exposed to less risk of home owners defaulting on their loans and often it is more about investor perception than economic reality. If investor sentiment is pessimistic regarding the future performance of the economy then it follows that a higher current interest rate for mortgage loans will be required to attract them.
2. Supply and Demand
Of course it isn’t just the investors who need to be attracted by the current mortgage rate by way of high yields. Home buyers also dictate the current interest mortgage rates rise and fall by their needs for affordable home loans. When current mortgage interest rates are too high many potential buyers will simply be priced out of the market and demand will fall. In this situation a relaxing of rates is required to attract new buyers into the market.
The supply – or volume – of mortgages that will be applied for and subsequently sold as bonds can be unpredictable and lead to situations where supply outstrips demand or the other way round. If there are too many home loans required for the number of investors willing to put up the capital then an increase in the current mortgage interest rate is required to attract them.
3. The Federal Reserve
Contrary to popular belief, the Federal Reserve does not directly control the current home mortgage interest rate. They do create a knock on effect however when they make changes to the Federal Funds Rate. This is a short term loan rate applied to banks which need to borrow from other banks to top up their cash reserves to an acceptable level, as defined by rules laid down by the Federal Reserve. This is literally an overnight loan and the rate is generally a suggested level rather than the actual rate used, which is usually agreed between the banks themselves.
When demand for lending is low a reduction in the Federal Funds Rate can help make borrowing and lending cheaper for banks, a saving that can be passed on to consumers, which in turn can stimulate new businesses and economic growth. If the opposite is the case and inflation is becoming a concern, an increase in the Federal Funds Rate can help steady the economy, and will likely increase the current mortgage interest rate.
4. Inflation
Inflation not only increases the cost of essential items like food and fuel, it also reduces the yields for property investors. Even if the current mortgage interest rate is high today, the effect of inflation could mean that it yields far less in the future. Reducing inflation has the opposite effect but either way current mortgage interest rates are affected.
There are other factors which affect the current mortgage interest rate to some extent, like the influence of foreign investment, which will itself be affected by the perceived health of the economy. Delays and inconsistencies between the changes applied to bond rates and those applied to the high street lenders can also affect current mortgage interest rates. The main factors are listed above though and these alone make it near impossible to predict with any certainty how rates will change going forward. One thing appears inevitable though, and that is that mortgage rates must rise at some point in the future, which will undoubtedly be an incentive for investors and a headache for home owners. We can only hope for an affordable middle ground which meets the needs of all concerned.
