We are delighted to hear that Prime Minister David Cameron wants to “keep mortgage rates low” but does he really have the power?
In a speech on housing this week, Cameron said interest rates on mortgages have fallen to their lowest ever levels.
He said a family with a £120,000 mortgage on a five-year fixed rate deal is saving £155 a month and credited Government policies.
He said: “We will help to keep mortgage rates low so families are more financially secure. When confidence falls, mortgage rates can spiral, homes become unaffordable and families risk losing the roof over their heads.
“That was the risk Britain faced in the last recession. But this Government came to office, set in place a long-term economic plan and showed the world we were managing our economy. As a result, mortgage rates have stayed very low.”
But how are mortgage rates actually set and can the prime minister control them?
Bank of England
The Bank of England sets base interest rates for the nation around which tracker mortgages and standard variable rates are set.
The rates are set by the monetary policy committee, which are 12 individuals chosen by the Chancellor and chaired by the Bank of England governor.
The body was made completely independent of Government in the late 1990s by then-Chancellor Gordon Brown.
The MPC sets rates so it ca meet a 2% inflation target and secure growth for the UK economy as a whole. The Government sets the target but has no further control.
Although the prime minister has a public platform and influence his control over rate setting is very limited indeed.
There is an argument that the general economic environment and low inflation allows the MPC to keep rates low. In addition, Chancellor George Osborne appointed Mark Carney as governor in 2013, a vocal champion of keeping interest rates low.
However, these are peripheral influences and on this test Cameron’s words ring hollow.
The other chief form of mortgage is the fixed rate deal which are not measured against the Bank of England rate, although it can have a competitive influence on pricing.
Fixed rates are tied to swap rates and international markets mainly gilts in the UK, which is the Government debt.
The Government has debts of more than £1 trilllion. The people who lend the UK that money charge an interest rate based partly on how likely it is the loan will be repaid.
Therefore if the Government has a more trusted plan to repay its debt then the interest rates it pays to finance its debt will be lower.
It works the same for a mortgage. If you are a more trusted borrower then you get cheaper rates.
Cameron would argue that by creating a credible plan to repay debts he has kept debt interest payments low and helped keep mortgage rates down.
There is some truth in this although, again, there are a number of factors beyond his control influencing debt interest costs.
The cost is mainly driven by international events. If Eurozone debt becomes riskier then investors pile into UK debt as a safe haven, pushing down rates.