Historic Lows for Average Mortgage Rates
Beginning in 2008, the housing bubble that had propped up the economies of the United States and other Western countries burst. Along with the collapse of much of the worlds financial infrastructure, the resulting financial crisis was the worst that the world had seen since the Great Depression of the 1930s. Average mortgage rates tumbled, but with banks refusing to grant credit, there were few buyers. As a result, housing prices crashed.
Since then, housing prices have begun to rebound, yet average mortgage rates have remained low. As of the second quarter of 2013, the average mortgage rate fell from 3.47 percent to 3.43 percent, according to figures released from the Bank of England. During the same period, average mortgage rates for new mortgages fell from 3.65 percent to 3.47 percent. However, mortgage rates seem to be on the rise again and housing demand remains far below the levels created before the financial crisis.
Mortgage Rates and Affordability
Along with house prices, mortgage rates and availability of credit represent the most important aspects of affordability in a housing market. When average mortgage rates are high, even modestly-priced houses are often financially out of reach to all but the most affluent buyers those who can afford to pay cash or at least manage the hefty monthly payments that result from high mortgage rates.
High mortgage rates effectively increase the asking price of a house by increasing the total amount that a would-be buyer must pay. Monthly mortgage payments are increased and the overall amount that a homeowner must pay over the life of the mortgage increases as well. As a result, fewer households are able to buy, placing upward pressure on rents.
By contrast, low average mortgage rates make housing more affordable for both buyers and renters. Because buyers are more likely to be able to afford to purchase their homes or flats, pressure is eased on the rental housing market. Prices for rents often decrease in an environment where mortgage rates are low. Its a simple matter supply and demand.
Help to Buy Equity Loans
The government in the United Kingdom has attempted to assist struggling would-be homeowners with the Help to Buy Scheme, which includes equity loans for low and moderate-income borrowers. The scheme assists borrowers who can provide a down payment of at least five percent of the purchase price of a home with an equity loan for an additional twenty percent. The home buyer then negotiates with a bank or mortgage lender for the remaining seventy-five percent of the homes purchase price. This scheme effectively increases the amount of down payment that would-be homebuyers are able to offer lenders. As a result, home buyers obtain lower average mortgage rates as well as reduced monthly mortgage payments.
Tight Credit and Mobility
Government schemes such as Help to Buy have made it possible for many would-be homeowners to compete on a level playing field on the open housing market. Nonetheless, it remains doubtful that demand will ever return to the fever pitch that occurred in post-industrialized countries around the world before the housing bubble burst. One reason is that despite schemes such as Help to Buy Equity loans, credit remains tight. Banks have sharply reduced the availability of such unconventional lending programs as interest-only loans, which allowed many home buyers with low and moderate incomes to enter the housing market.
As a result, many buyers who might have moved out of â€œstarterâ€ homes into larger, more expensive homes are unable to do so. In some cases, they are trapped in homes that carry mortgages that are more expensive than the worth of the home. In other cases, renters who would like to move into starter homes have found that the available housing stock is minimal and priced beyond their means. This is especially true given the tight credit environment that has persisted into the second decade of the twenty-first century.
Housing and Inequality
The ongoing problems in the housing market reflect a growing level of inequality in many post-industrial societies. In blunt terms, the rich are becoming richer while everyone else slips toward poverty. In such an environment, it seems inevitable that a large proportion of the population will struggle to afford decent housing. Nonetheless, it is impractical to count on continued low average mortgage rates or even sustained government assistance schemes to mitigate the problem of scarce affordable housing.
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