Presumption of a rate rise is already shifting lender action

The recent Budget produced something of a ‘Meh’ reaction from most of the mortgage and housing market, which is probably partly based on the fact that over the last couple of years other announcements have tended to include game-changing measures which shift our sector significantly.

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Rory Joseph and Sebastian Murphy | JLM Mortgage Services
3rd November 2021
Sebastian Murphy Rory Murphy JLM
"While we think that a BBR rise is imminent, there is no guarantee we’ll end up at the end of next year having seen multiple rises."

In July 2020 we had the announcement of the stamp duty holiday, followed by its extension in March this year, and while there is a part of our industry who seem to want stamp duty incentives to be made at every Budget, given what has been bequeathed to our market over the last 15 months, there was absolutely no chance of a repeat.

Measures announced by Rishi Sunak in October focused more on building more homes and there’s no doubting the UK desperately needs more housing supply coming to market, whether new-build or otherwise.

However, there was a distinct feeling that we’ve heard it all before. Sunak talked about building 1m new homes but we’re unsure over what timescale, and this target seems to be a shift from the 300,000 new homes to be built by the mid-2020s which was mentioned repeatedly prior to this.

We were recently asked by a client, “Do you think house prices will fall anytime soon?” and we simply had to point to the supply of homes in the UK and the significant demand that still exists. House price inflation is likely to tick along very nicely while this imbalance continues and, even with these Government announcements, it looks highly unlikely that supply will meet demand in the short-, medium, or long-terms.

Other commentators have talked about inflation and what that might mean for interest rates, with the expectation that the Bank of England MPC will have to act in order to try and get inflation down to anywhere near its 2% target.

Sunak made a big deal in the Budget about how he has already written to the Bank reiterating their role to keep inflation at target levels. In the same breath he talked about inflation being above 4% throughout 2022, and actually for consumers that inflation levels is likely to be above 5%.

The assumption of course is that this means rates are going to rise this year – probably up to 0.25% - and that we can expect further rises throughout next year. Which might well be the case, but you also must consider the Government might not be wholly unhappy with inflation at high levels and rates staying low, because of the sheer amount of debt it has and will need in the future.

Servicing its debt at these low interest rates is in its favour, as is high inflation because while it stays at those top levels it is reducing the debt. Effectively, the Government is inflating its way out of the debt it has needed to take on because of the pandemic, etc. It suits it for this to remain the status quo for some time.

So, while we think that a BBR rise is imminent, there is no guarantee we’ll end up at the end of next year having seen multiple rises.

For the mortgage market of course, rates will always be of interest and the presumption of the BBR rise is already shifting lender action. Already we’ve seen product pricing – particularly at lower LTVs – inching up, which is no bad thing because (quite frankly) the rates on offer were super low, especially when they were not matched by what was being offered further up the risk curve.

Now, we have slightly higher rates at 60% LTVs and slightly lower rates at higher LTVs, which when you think about how many borrowers this provides a greater incentive to, is definitely the right way to go about it. For the life of us, we can’t quite understand why lenders were willing to fight like cat and dog to secure a smaller pool of lower-risk borrowers and not willing to be more competitive at 90/95% LTV.

Hopefully, this is a trend that is turning. Our experience is that hardly any borrowers expect to get a rate below 1%, but there are plenty of borrowers with smaller levels of equity/deposit who, in a low-interest rate environment, do expect to get a rate which is not 3%/4% above BBR. Perhaps that message is finally getting through.

Overall, the Budget changes very little for the housing market, certainly in the short-term, although wider economy issues, particularly increased inflation and the cost of living, may well provide a further opportunity to advisers. Who wouldn’t want to save money on their mortgage right now when they’re paying more for so many things? With hundreds of thousands of borrowers still on SVRs there should be a pool of clients we can all aim at to change this situation.


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