Ultra-low interest rates are set to return with inflation due to tumble in the near future, according to the International Monetary Fund (IMF).
This will be welcome news to homeowners, many of whom have recently been hit with a steep rise in mortgage costs. The United Nations financial agency says that the combination of an ageing population and low productivity is set to rein in inflation and take interest rates back to pre-COVID levels.
Skyrocketing inflation, currently at a four-decade high in Britain, is only a hiccup in the overall trend for low interest rates, rather than a permanent change to the global financial landscape, the IMF said. Recent increases in real interest rates are likely to be temporary. When inflation is brought back under control, advanced economies' central banks are likely to ease monetary policy and bring real interest rates back towards pre-pandemic levels, a report by IMF economists concluded.
The IMF analysis found that the "natural" rate of interest had not been changed by the pandemic. The so-called "natural" rates of interest, an anchor for monetary policy that neither stimulates nor discourages economic activity, "will remain low in advanced economies or decline further in emerging markets," the report concluded.
If accurate, that means less fiscal pressure as governments will be able to borrow more cheaply. But it would mean central banks, particularly in developed countries, may again have to rely on bond buying and other strategies to cut policy interest rates. Some economists have argued the pandemic shifted the natural rate of interest higher, reversing forces like globalisation that helped keep borrowing costs low and also driving up government debts to historic levels.
The IMF said it is possible things have changed, and noted that the impact of developments like the transition to a less carbon-intensive economy remain to be seen. However, the fund said its analysis suggests that the current high rates "are likely to be temporary". Once rates normalise to prior low levels, a deep enough recession may force central banks "to resort to the same strategies they employed in the decade before the pandemic, such as balance sheet policy and forward guidance.
The return of 100% mortgages could spell disaster for the housing market
Deposit-free mortgages are about to return to the housing market – but experts have warned they pose a risk of negative equity and threaten to destabilise the banking system. Skipton Building Society plans to launch a new loan that would allow borrowers to bypass standard deposit requirements by using their rental payment history. Borrowers typically need to pay a deposit of at least 5% of the purchase price when taking out a mortgage.
Skipton said its mortgage would “enable people trapped in rental cycles – where they’re prevented from being able to save for a house deposit – to access the property ladder”.
It comes as first-time buyers are increasingly shut out of the housing market by higher mortgage rates and the withdrawal of the Help to Buy scheme, which provided interest-free loans of 20% – 40% in London – for five years to help them buy a home with only a 5% deposit. The challenge of helping first-time buyers is a growing battleground area in the run-up to the next general election. Labour has announced it is working with lenders to develop a state-backed mortgage guarantee scheme to help first-time buyers take out loans.
Meanwhile, rising rents are making it harder for tenants to make the switch to home ownership. Rents have increased by 11% in the past year, according to property website Rightmove. Stuart Haire, Skipton’s chief executive, said, "the society’s new mortgage would help struggling renters. There are too many people who are trapped in rental cycles. These include people who have a decent history of making rental payments over a period of time and can evidence affordability of a mortgage, yet their only barrier to becoming a homeowner is not being able to save enough for a deposit and through lack of access to the bank of Mum and Dad.”
Benjamin Trevis, an economist at the Centre for Economics and Business Research, a think tank, said, "a zero-deposit mortgage may appeal to some aspiring homeowners but there are potential downsides. This form of debt will likely include an added premium on top of an already elevated cost of borrowing at present. Moreover, 100% mortgages can increase the risk of default by borrowers as they are more vulnerable to falls in their own home value, which can lead to negative equity and problems with refinancing or selling their home. The banking system could also be put at risk if lenders start offering larger loans. For lenders, the recent banking turmoil has highlighted the need for more liquidity in a banking system that is currently being squeezed by higher interest rates, so zero deposit mortgages may be adding more risks to balance sheets during an already difficult period.”
Adrian Anderson, of broker Anderson Harris, said "borrowers who take out a 100% mortgage could find themselves in negative equity “very quickly”, especially given falling house prices. It absolutely could be a risk to the banks if they started to do that, lenders would be massively exposed if they did not take some sort of equity. The only time I remember banks lending 100% of the purchase price was before the financial crash of 2008. The banks were lending more than 100pc and got away with it for years because values were going up and up. But if applicants cannot keep up their payments or there is a bit of a crash in the market, he said the lender’s loan book “is effectively underwater” if properties are worth less than the mortgage. That's an issue for the lender and the borrower, the borrower won't be able to sell, they won't be able to sell and redeem the mortgage, unless they find some of their own cash to help repay part of the mortgage. People will be stuck: they won't be able to sell and move on.”
In the run-up to the financial crisis, Northern Rock was the most prominent example of a lender that offered loans of up to 125% of the mortgage value. Other lenders currently offer 100% mortgages but they are still backed by funds from the applicant’s family, experts said. Barclays offers a 100% mortgage that requires an applicant’s family member to put 10% of the purchase price into a cash savings account, which they cannot access for five years.
Skipton's new mortgage would still need to be approved by City regulators the Prudential Regulation Authority and Financial Conduct Authority. The lender said it has not confirmed the loan-to-value of the mortgage and will look to manage the potential risks and challenges first-time buyers could face in the future.