Managing Through Mortgage Uncertainty
Written on 28 September 2022 by
What Is Influencing Mortgage Market Conditions?
The Bank of England (BoE) Base Rate - the rate that the BoE charges other banks and lenders when they borrow money - has increased for the seventh consecutive time since November 2021, from 0.10% to today’s 2.25%.
Last week witnessed 2 independent events: the Monetary Policy Committee’s 6 weekly meeting to discuss revisions to the Base Rate on Thursday (to seek to mitigate inflation), followed by Friday’s "Fiscal Statement" - or "mini-Budget" - where the Government outlined measures it was instituting to seek to grow the economy, notably a package of tax changes (including Stamp Duty on home purchases) funded by public borrowing.
The background context of political direction, energy support package commitments, cost of living challenges and perception of the US Federal Reserve being more proactive in raising interest rates to tackle inflation, has triggered financial markets to push down the value of Sterling (British Pounds) trading against the US Dollar from $1.16 - when Liz Truss became Prime Minister 20 days ago - to close on Friday at $1.08. Similarly, bond prices have fallen, which further increases the Government’s cost of borrowing. This reflects a lack of ‘confidence’ by financial markets in the outlook for the British economy in the near term.
Confidence has been further undermined by the Governor of the Bank of England, Andrew Bailey, saying that the Bank "will not hesitate to change rates as "necessary" - with unqualified rumour that the Base Rate could increase as soon as this week (rather than November’s scheduled review) - and the Chancellor of the Exchequer, Kwasi Kwarteng, pledging that "there’s more to come" for economic reform. Analysts have warned that the Base Rate could reach 6.0% by the middle of next year - increasing monthly repayments on loans - in order to meet the challenge of inflation.
The Bank of England has announced today - 28th September 2022 - it will support the long end of the Gilt market and as a result Gilt prices at the longer end have rallied strongly and yields have fallen. The Bank’s statement includes the following:
"The Bank will carry out temporary purchases of long-dated UK Government bonds from 28 September. The purpose of these purchases will be to restore orderly market conditions. The purchases will be carried out on whatever scale is necessary to effect this outcome.”
Prices are exceptionally volatile but at the time of writing Gilt yields have fallen today as follows:
- 2 year: 6bp to 4.50%
- 5 year: 11bp to 4.56%
- 10 year: 27bp to 4.23%
- 30 year: 51bp to 4.46%
This might reduce the scale of rate increases from lenders who haven't increased rates so far this week.
It should also result in more 10 year fixes having lower rates than 2 or 5 year.
This is only a temporary respite as The Bank has said it will continue buying Gilts until 14 Oct but it buys some time and no doubt having established the principle it will consider whether further action is needed beyond 14th October.
The MPC has also reiterated that it does not plan to increase the Bank Rate before its scheduled November meeting.
What Does This Mean For Borrowers?
Financial markets hate uncertainty. For mortgage lenders (principally Banks and Building Societies), uncertainty in the economic outlook creates risks to profitable lending, particularly when pricing longer term fixed rate mortgage offers, allied to concerns over clients’ means to afford future repayments. This has translated into several outcomes which ultimately impact on borrowers:
A Rapid Withdrawal of Mortgage Products Available
The number of residential mortgages on offer by lenders fell between Tuesday (27th September 2022) and Wednesday (28th September 2022) by 935, down to 2,661 according to financial information firm Moneyfacts. This reflects a general trend of declining mortgage products available to borrowers since Base Rates began to increase in December 2021, where the overall decline in mortgage product availability has fallen by 50%.
Virgin Money and Skipton Building Society have temporarily withdrawn their entire mortgage product range, whilst Halifax (the country’s largest mortgage lender) have said they will remove fee-paying mortgages from Wednesday. Other lenders to withdraw mortgage products for new customers include: Clydesdale Bank, Paragon, Nottingham for Intermediaries and Leek United; whilst Scottish Building Society, Darlington and CHL Mortgages have withdrawn all fixed rate mortgages.
Strong market demand for fixed rate mortgage deals has also brought pressure to bear on lenders (and conveyancers). Lenders are concerned also over their capacity to serve borrowers efficiently, hence they are either withdrawing product availability to cope with demand or pricing less attractively in order to manage application volumes.
Longevity of Mortgage Products
Borrowers and brokers are experiencing the expiration of mortgage product availability within hours with little notice as lenders seek to re-price their terms. If you secure what you deem to be an acceptable rate for your circumstances, then you will need to seek to secure this quickly. Where a mortgage offer is more advanced, for example having a Decision in Principle from a lender, we are beginning to experience lenders stipulating time limits of 2 weeks to complete submission - or risk losing the agreed rate.
Withdrawal of Fee-Based Products
A number of lenders, including Halifax, are removing mortgage products that charge a fee. These fee-based deals typically would result in a lower monthly repayment for homeowners, with the fee being added to the total mortgage debt (although monthly rates may be lower, the overall cost of the loan will be higher due to more interest accruing over the agreed mortgage time). This means that borrowers have fewer products available and potentially greater monthly mortgage payments.
Increased Mortgage Costs
The withdrawal of fee-based products sounds attractive however they can prove more costly in the long-term, together, simultaneously, with higher mortgage interest rates. Due to high demand for mortgage products from lenders, you may need to be prepared to pay more to secure comprehensive, fast service from a lender remaining on the market while others have temporarily withdrawn.
Affordability
In August 2022, the Bank of England repealed its mortgage affordability rule requiring Banks and Building Societies to stress test whether homeowners could adequately meet a 3% rise in interest rates. The onus to assess affordability has been returned to regulated lenders to ensure that borrowers can afford to meet their mortgage repayments. The consequence is that, as the Base Rate rises and household costs increase - and to meet prescribed profit margins and deal efficiently with the volume of applications - lenders are tightening their lending criteria for qualifying customers. This means that borrower expectations on what they could previously expect to borrow to finance a purchase may decrease as the lender has a lower risk appetite to provide finance against an uncertain economic forecast. Borrowers should also consider the potential for a "down valuation" of their property if they are remortgaging.
Remortgage Repayment "Shock"
Around 2 million UK residential borrowers are subject to standard variable rate loans. Further, there are approximately 1.8 million borrowers who are locked in to fixed rate mortgage deals which are due to expire within the next 12 months (source: UK Finance). Borrowers on standard variable rate mortgages will see their monthly mortgage repayments increase in-line with the Base Rate. Borrowers on fixed rate mortgage products, at the expiration of their current deal, will be subject to a new mortgage rate, set by current financial conditions - these may be very different to the payments that you agreed between 2 and 5 years ago when the Base Rate was significantly lower.
For example, a household that had a £200,000 mortgage 2 years ago would have been able to secure a 5 year fixed at a rate of 1.88% with HSBC, over a 25 year term payments would equate to £836pcm on a capital and repayment basis.
Using the same hypothetical scenario, a similar client raising £200k on a 25 year term would be looking at a 3.76% on a 5 year fixed with Barclays, and a monthly payment of £1,029.35.
An overall difference of £2,316 extra a year.
For many households stories of further rate rises reaching 6% could mean fixed rate mortgage rate increase between £400 - £600pcm on the average homeowner loan.
The increase in mortgage repayments may prove challenging for borrowers.
How Can Borrowers Prepare?
Prepare Your Application Documents For Decision-Making
With lenders withdrawing rates at short notice, it may prove to be helpful by having your affordability information well-prepared, complete mortgage submission documents in a timely fashion and to feel confident that you can make decisions when required.
Remortgaging
You can secure a remortgage offer up to 6 months in advance of your existing deal ending (or weigh-up whether being subject to early repayment charges (ERCs) makes sense for your circumstances). Discuss with an experienced broker whether a remortgage makes sense for you and explore your affordability and attitude to risk.
Be Prepared For Down Valuations
Based on the UK House Price Index data from HM Land Registry, around 866,906 out of a total 1.95 million property transactions may have been down valued between January 2020 and January 2022. House price inflation has been sustained for several years and there is evidence of increasing circumspection as lenders tighten their criteria for borrowers, so you may be able to borrow less than you anticipated (known as a down valuation).
Prudent Budgeting - Interest Rates May Increase Further
Analysts are suggesting that the Base Rate may reach 6% by the middle of 2023. The housing market price index has remained relatively robust in terms of growth, driven by a lack of supply of houses available to purchase. We recommend carefully evaluating your attitude to risk and reviewing budgets and expenditure.
Use Savings To Secure A Cheaper Deal
If you have savings, you may be able to pay off some of your mortgage which will reduce your monthly outgoings. This will typically only apply if you still owe more than 60% of your home's value on a mortgage though. You will also need to check the level of overpayments with your lender that are allowable annually within your current arrangement.
The main bands where interest rates drop most are at 90%, 80%, 75% and 60%.
Talk To Your Existing Mortgage Lender
If you are concerned about affordability of your existing loan, be honest with your lender as soon as possible: they may be able to help with short term solutions such as a mortgage holiday, switching to an interest-only mortgage or extending your monthly payments.
Review Your Protection Insurance
If your circumstances have changed due to health or work conditions, you may find existing protection policies may cover circumstances of which you were not aware.
Contact An Experienced Mortgage Broker
If you’re worried about any of the topics in this article, or you’re coming to the end of a fixed rate and are concerned about how the rate increase will affect your mortgage payments, contact John Charcol on 0330 433 2927 and one of our expert advisers can help you figure out your next steps – whether they be debt consolidation, remortgaging, further advance, product transfer, reviewing your protection policies or something else entirely.
Additional Help
You can also get free debt advice from:
- Money Helper - 0800 138 7777
- Citizens Advice - 0808 800 9060
- StepChange - 0800 138 1111
- National Debtline - 0808 808 4000
Category:Nicholas Mendes
