Mortgage Rates – What Drives Them?
One of the most frequently used words in the mortgage business is “rates”. Actually, to be entirely fair, it is one of the most frequently used words in the mortgage advertisement business – in no small part because the word “interest” is known to terrify a large number of people, even those who do not know why it does. Interest rates are one of the financial indicators that draw quick and decisive reactions from financial experts presenting specialised programs about money which always seem to be on when you are stuck in front of the television. It may be hard to pay attention, but it is worth it – you could just save yourself a lot of money.
When interest rates are high, it is a sign that the economy is in one of its periodic “boom” phases, and the government and banks are placing more interest on transactions essentially in order to discourage excessive and overly-optimistic consumer behaviour. Unsurprisingly, then, when interest rates are low it tends to be a sign of just the opposite. The economy is in poor shape, the banks are reluctant to lend and businesses are struggling to keep their heads above water.
While these periods are traditionally poor for business and considered to be bad financial times, they can be advantageous periods for people with borrowing power, who will find that the lower interest rates increase the range of properties which they can buy. Governments encourage people to spend in these times as they feel it stimulates the economy, but only those customers who have built up good credit scores over the years need apply – bad credit ratings mean limited access to credit, and financial recession means the same. Limiting access to credit this much more or less guarantees that only those with the top credit ratings are entitled to expect a mortgage.
This balancing act by the banks is one of the more interesting elements of the lending business. On the one hand they have deals with low interest rates, which any borrower would covet at any time. On the other hand, they are unwilling to give mortgage deals to any customer who does not have a positive credit rating. This is a situation which, if allowed to persist, would mean a lot fewer homeowners in any society, and would have grave implications for the economy. The typical upshot of this is that governments will step in to inject some capital into the banks and persuade them to lend to consumers. Compared with times gone past when banks were occasionally too ready to lend even to high-risk customers, this situation is one that offers different challenges.
One situation that has arisen in the past, and which banks are keen to prevent from happening again, is the sub-prime mortgage crisis. In that crisis, people who had little or no credit rating were given mortgages anyway, with high interest rates to reflect their high level of risk. Unsurprisingly this led to a lot of people defaulting on their mortgages, and partially triggered the worst financial crisis this world has seen in over sixty years – a crisis we are still dealing with, so it remains to be seen what lessons have been learned.