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A Word on the Mortgage Market – Sept 2023

A Word on the Mortgage Market

Hello and welcome to the latest edition of A word on the mortgage market. We do hope you had a good summer enjoying the wall to wall sunshine that the UK gave us all. Yeh, right.

When last we spoke, the mortgage market was pretty chaotic. Thankfully, we are beginning to see signs of calm. Not the type of calm that allows us all to kick back of course, more a calm that is relative in comparison to what has gone before. And, finally, a pause to the incessant rise of bank rate (more on that to follow). Let’s jump in and explore where we are in more detail.

The wider financial context

As always, there are a number of factors that we look at when assessing the state of the financial markets and what it means for mortgages.

Inflation

Two days ago, the latest set of inflation figures were announced. And they came with a surprise. Thankfully, not the type of surprise that delivers an impending sense of doom, for once. Because, despite a growing expectation that inflation would rise, it actually fell slightly. It now sits at 6.7%. While this of course is still high and well above the target rate of 2%, that’s three falls on the trot. A trend worth celebrating. Albeit mildly.

Rates

Let’s start in Europe. Last week the European Central Bank (ECB) announced a 0.25% rise in their interest rate to 4%. This wasn’t unexpected. However, some good news was found in the press conference held after the announcement. The bank’s president, Christine Lagarde, whilst not explicitly stating it, gave a very, very strong indication that this would be the last rate rise for now. Like the UK, they remain concerned about inflation, but the increasingly weakening Eurozone economy is now weighing heavily on their combined minds. Interestingly, some commentators on the continent are now suggesting the next move will be down. Not for some time, but down, nonetheless.

Over the pond (that’s the big pond), the FED announced a pause to their programme of rate rises earlier this week, which is a positive sign both for them and the world at large.

Now, let’s get to the good (relative, of course) stuff. For the first time in almost two years, the Bank of England has not (we repeat not) put up base rate. At the start of this week, the rise was all but a certainty, but the inflation news and a few other factors have come together to show the Bank that perhaps enough is enough. The programme of continual rises is finally, in their eyes, doing its job.

Before we get too carried away, the vote was close. 5-4 in favour of maintaining the rate at 5.25%, which suggests some healthy debate occurred and that the door is still open for another rise. But we think we are done. As to when we might see rates come down that’s very difficult to predict. We think we will be at this level for a while yet but, as always, only our good friend time will tell.

Swap Rates

To briefly remind you (as we always do), Swaps are the rates that lenders lend to each other on and are a key determiner of mortgage rates. Back at the end of June, when we last entered your inbox, 5-year Swaps stood at 4.85%. Since then, they’ve been on a journey. They’ve gone up, rising to well over 5% for some time, and they’ve come down. Thankfully, that downward movement is the current path. At the time of writing, they stood at a smidgeon over 4.5%. Another cause for (mild) celebration.

What does this all mean for mortgages?

We are lucky enough to have a first-class mortgage technical team in our business. They provide the backbone of our daily knowledge, always updating us on what’s happening in the market and what the UK lender population are up to. And, for the first time in quite some time, we look forward to receiving their daily updates. Yay! Because all we are seeing right now are rate reductions. Lenders, more or less across the board, are cutting rates with the frequency of which they increased them a few months ago.

As we predicted earlier in the year, lenders would have to react at some point if they want to hit their annual targets. Given we find ourselves almost in the last quarter of the year, there’s not much time to do that. So, right now, we are in the midst of a bit of a rate war. That can only be good news for borrowers. Of course, there is so much more that goes into picking the right mortgage for you than just the rate, but it’s good to know that mortgages are now being arranged in the backdrop of falling rates.

Perhaps the biggest decision right now is what type of product to take. Whilst no amount of generic advice will do, here’s a very high-level view.

For so long, locking into a 5-year fixed rate really was the only sensible choice, but not anymore. At least not now. The way we see it, borrowers are faced with two key questions currently. Is the time to switch to trackers and discounts here? And should you be looking more short-term to ride out the tougher times in the hope that better days are coming?

You won’t be surprised when we tell you that there is no easy answer to either of those questions. However, there’s certainly a good degree of sense in taking a short-term view now in the hope of better long-term deals being available in a couple of years’ time.

As we trailed a moment ago, generic rate comparisons are not overly helpful, but it’s worth a brief mention to set some context. At a Loan-To-Value of 75%, the best initial rates on a two-year discount or tracker are around 5.5%. For a 2-year fixed rate on the same basis, you can expect to pay a touch more, around 5.6%. The best 5-year fixed rate on the market as we write has a pay rate of 4.99%, but the average rate is more like 5.25%.

Now, whilst at face value the 5-year deal looks better (albeit not by much), the bigger question is where we will be in a few years’ time. If, as expected, rates start to fall at some point and lenders become more competitive again, there is a good chance that we will see much better pricing in the 5-year market. So, taking a 5-year deal now might prove to be a painful decision further down the line (hopefully you are still with us).

Summing up, it’s hard to know what to do. But what this does mean is that keeping in touch with your adviser is crucial. It’s a statement of the obvious, but they will help you make the best decision for you. If the time for a new product is upon you or fast approaching, not only are they able to advise you whether to remortgage, or simply switch to a new mortgage with your current lender, they are able to secure the best rate at the time. And they can even change to a better rate at a moment’s notice (should one become available) as they have access to the lenders most up to date products every minute, of every day (as we highlighted earlier).

Do stay in touch. Until next time, we bid you adieu.