Rising Gap in Mortgage Loan Rate in the U.K.
In the UK mortgage rates move in accordance with the base rate introduced by the Bank of England. The base rate has been standing at 0.5% for the past three years, but now the mortgage rate is beginning to rise. This is because banks are giving instant loans by lending more than they are getting in deposits. The gap that arises because of this has to be filled in somehow. Banks fill this gap by taking short-term wholesale financing from the global money markets.
The interest rate of obtaining finance from global money markets is high. The availability of funds and its interest rates is highly volatile. This also involves considerable risk. So to cushion themselves against this risk banks are charging higher mortgage rates. This same condition is also prevailing in Australia.
Banks in the UK are realizing that more depositors have to be attracted to fill the gap. This makes the market more competitive and banks have to offer higher interest rates on deposits. This in turn raises the cost for banks, further raising the rates for home loans. It’s like a never ending vicious cycle.
Households in the UK are struggling to make their monthly payments unlike households in Australia. However, banks can only manage to cut some costs and are forced to raise their profitability. Banks are also forced to do this to offset the risky loans that they have already lent out in the past.
Rising Home Loan Rate Gap in Australia
The gap between mortgage loans and cash rates in Australia is at its widest point over the last eighteen years. On March 2, 2012, the Reserve Bank of Australia (RBA) released a report stating that the average standard mortgage rate in Australia stands at 7.4%. This is 3.15% higher than the RBA’s cash rate that stands at 4.25%.
This has followed the decision of major banks in Australia lifting their mortgage loan interest rates in February 2012. The banks blamed the rising costs in the global funding and deposit markets. These out of cycle rises have contributed to raising a 3.15% mortgage gap.
This was all done despite the fact that funding pressures have recently been eased. According to financial analyst this is just a tactic of the banks to increase their profitability. They are also of the opinion that the interest rates will continue to rise in the coming three years.
The pressure has been on Australian banks to raise more funds in the coming years. And it is expected that in the coming six years they will have to raise 7 billion dollars for extra funding each year. There are also anticipations regarding a cut on the interest rate. Economists are expecting the RBA to hold the interest rates in place till the quarterly inflation rates are released by the end of April this year. 25% cut in the base rate is expected by the end of May.
The global financial crisis may not have affected the Australian economy, but now the home buyers will be facing the consequences. According to Bloomberg, the Australians are paying more in mortgage loans than any other developed country. This is an implication of Australia being a strong economy.
In the U.S. the base rate is close to zero and the mortgage loan rates are at an average of 3.15% fixed for fifteen years on an average. While in Australia a mortgage is fixed for ten years on an average at a minimum of 7.59%.
Conclusion
It remains to be seen how this will affect households in the UK that are already struggling to meet their mortgage payments. People are being forced to resort to instant loans like open door loans to meet their monthly mortgage payments.
If you already have a property under mortgage, then try to cap your Mortgage loan interest rate. There are many banks in the UK that are offering this facility. But if you were planning on purchasing property in the coming year, the best advice would be to look around and find the best home loan interest rates. It really is not necessary that you take a loan from one of the major banks. There are other options available in the market like open door loans.
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