Mortgage rates dropping as base rate looks more stable

Now that a rise in the base rate looks less likely, the mortgage rates on offer are getting more attractive.

Until recently, a lot of analysts were expecting the rate to rise in the near future - so what`s changed?

Inflation`s fallen

First of all, inflation has fallen. In March, it came down to 4%, from 4.4% in February. That`s still twice as high as it should be - according to the target set by the Chancellor, George Osborne - but it`s still a step in the right direction.

That removes a fair bit of the pressure on the Bank of England`s Monetary Policy Committee (MPC) to increase the base rate in an attempt to stop inflation climbing.

Just bear in mind that CPI (Consumer Prices Index) inflation isn`t the only way of measuring inflation. There`s also RPI (Retail Prices Index), which takes the cost of housing into account.

RPI inflation stood at 5.3% in March, but the official `inflation target` always means CPI, so that`s what the Bank pays attention to when it`s thinking about base rate decisions - like the one today, when it decided to keep the base rate at 0.5%, where it`s been ever since March 2009.

Sources:
* Bank of England
** The Guardian
*** Andy Gray, Barclays` head of Mortgages

The economy`s still struggling

Another major factor is the state of the UK`s economy. Again, we`ve had some good news recently, and again it`s only relatively good - and it comes on the heels of some worrying figures that most people didn`t see coming.

The most common way of measuring the economy`s health is by looking at GDP (Gross Domestic Product - which basically sums up the total value of the goods and services the country produces).

So when we heard that GDP rose by 0.5% in the first three months of the year, it was proof that the economy was growing again. However, all that growth really did was `cancel out` the unexpected 0.5% decrease we`d seen over the previous three-month period, meaning economic growth was pretty much zero between October last year and March this year.

The Office for National Statistics, which compiles these figures, tells us that so far, the economy has only regained about a third of the ground it lost during the recession. After all, that recession lasted for a year and a half, and GDP had fallen by a full 6.4% by the time it finished. (Looking back to the last two recessions, it took a little over three years for the economy to get back to where it was before the recession started.)

So there`s still quite a way to go before analysts agree that the economy`s looking healthy again - and as critics point out, we`re only just starting to see the impact of the austerity measures, which are bound to dampen consumer confidence and limit spending in the shops, holding back economic growth.

Of course, damaging the economic recovery by increasing the base rate too early is something the Bank really wants to avoid.

So what are mortgage rates doing?

An article in the Guardian, which tells us that a `mortgage price war is heating up`, points out that Woolwich has dropped the rates on its tracker and fixed-rate mortgages by up to 0.32%; Skipton has lowered its fixed rates by up to 0.5%; and both Northern Rock and Halifax have dropped rates on buy-to-let mortgages by as much as 0.4%.

And Ray Boulger, senior technical manager at mortgage broker John Charcol, reckons we could see the best five-year fixed-rate mortgages drop below 4% in the near future.

Tags: base rate, mortgages, mortgage rates, George Osborne

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