We’re definitely in a global marketplace. That’s not really news but there are so many interactions between countries and financial institutions.
Sometimes, most times, we take any geopolitical news in stride and not pay very much attention to what is happening in France or Belgium or Japan.
So what is the effect of Brexit? We’ve got jobs to do, after all and our everyday lives aren’t really impacted when economic events happen overseas. Our economy after all is so large that what we do affects other countries more than what other countries do that affects us. But what happened in the U.K. last June is certainly having a direct impact. On mortgage rates.
That’s right, mortgages. When British citizens voted to leave the European Union later this year, the so-called “Brexit” ballot, the financial shock-waves surprised many. The decision to leave the EU even surprised most of the political pundits who predicted there would be no way that Britain would decide to leave as pollsters indicated Britain would indeed remain part of the EU.
This move also makes it more feasible that other countries that currently make up the EU might decide to do the same.
The EU was formed in order to bolster the European economy when several nations band together to make trade deals with other countries. With Britain’s exit, the European Union clout is diminished. That could impact everything from trade negotiations to import/exports. But it’s also had an impact as investors flock to safety waiting for the dust to settle.
Stocks and Bonds and The Effect of Brexit
When investors believe the economy is just beginning to turn around or a company’s quarterly update will be better than expected, the bet is to buy stocks. Stocks provide greater returns than bonds but what stocks don’t have that bonds do is safety.
When an investor buys a bond, the return is a known quantity. The investor knows how much the return will be and when. With a stock, there are no such assurances.
So what does that have to do with mortgage rates?
Interest rates from one mortgage company to the next are surprisingly similar. You won’t find one lender offering a 3.50% rate when everyone else is quoting 4.00%, all things being equal. That’s because all mortgage companies price their mortgage loans on the very same set of indexes called mortgage bonds. These bonds are like any other bond in that their yields are known upon purchase. Investors buy bonds for safety, not for high returns. And when safety is a major issue, the demand for bonds increases which drives up the price. When the price of a bond, including mortgage bonds, goes up, the rate of return goes down. In times of uncertainty, bonds will be sought after. And that’s where Brexit, and the effect of Brexit, comes into play.
Today, mortgage rates are hitting lows not seen in the past three years and much of this is due to the Brexit vote. No one is really certain of the impact British voters have on the economic future of European countries. If the economic clout of EU countries is diminished, it’s not clear the impact it will have on trade. If European countries slow down importing goods from the U.S., or any other country for that matter, it could have a ripple effect on jobs, wages and manufacturing. When investors see this as a real possibility, the push will be toward bonds and less so for stocks.
Analysts have suggested the recent decline in rates could very well mean more than 1.3 million more borrowers can now benefit from a refinance due to the lower rates. Or, home owners can afford to buy a bigger home as monthly payments will be lower. A drop in rates increases a buyer’s purchasing power.
Think Beyond the Rate
For those who have a 30 year mortgage rate at 4.00% or above, they should think about refinancing to a lower rate or changing from a 30 to a shorter term. Remember that it’s not always just about the interest rate but also about the costs involved when obtaining a mortgage. There are closing fees involved with a refinance just as there were when purchasing a home. The drop in monthly payments due to a lower rate should be compared to the closing costs involved. Or, changing a loan term can also provide rewards lowering the amount of long term interest paid to the lender.
Yet without the effect of Brexit move, it’s unlikely we wouldn’t be seeing the rates we’re seeing today. Mortgage bonds and U.S. Treasuries alike have benefited from the Brexit uncertainty and the result for home owners is a positive one.
When looking at a refinance, you must also look at how far into your current loan you are right now. If you got a 30 year fixed rate five years ago and you have 25 years remaining, getting another 30 year mortgage essentially means you now have a 35 year loan. Instead of looking only at a 30 year loan, take a look at a 25 year or even a 20 year option.
Realizing The Effect of Brexit. Now What?
Brexit has had an impact on most all loan types and terms. Even adjustable rate loans and hybrids have benefited. The 30 year average rate saw a 25 basis point drop within days after the Brexit decision.
What’s also interesting is that it can take years for Britain to completely remove itself from the EU. In fact, it’s possible, though not likely, that Britain could hold another vote and cancel the initial Brexit decision. That would again create a bit of turmoil in financial markets and anytime uncertainty comes into play, money flows out of stock and into bonds. Or not.
The key here is if refinancing now makes sense, don’t play with the market hoping to squeeze out another .125%.
It doesn’t take very much to spook bond markets and once the economic dust begins to settle and the actual impact Brexit will have been realized, much of the uncertainty will have been removed and bonds, including mortgage bonds, will be sold. And you know what that means.
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