"This is a complex mortgage market to be dealing with, and in that sense, advisers are going to be called upon more than ever before."
The interest rate cat was firmly let out of the bag earlier this week with the much-anticipated news from the Bank of England’s Monetary Policy Committee (MPC) that it would be increasing Bank Base Rate (BBR) to 3% in order to try and bring inflation down.
I am fully aware that there are some strongly-held views about the wheres, whys and what-fors with regard to such an approach, particularly as we are constantly told, that the big increases in UK inflation have come as a result of ‘outside forces’.
Therefore, the Bank increasing interest rates, particularly during a cost of living crisis may actually exacerbate the situation and make the anticipated deep recession it talks about even worse.
That obviously has to be taken into account as we look at whether the biggest increase in BBR over the last 30 years is actually justified and will actually do what it sets out to do. Many will have their doubts.
Moving this into the mortgage space, while this increase has been anticipated particularly over the last few weeks, it still does hit hard in terms of the increase which the Bank deemed to be required, and indeed the anticipation of more to come.
However, and it’s always important to look for the positives here, I’m leaning towards an opinion that lenders have/had already baked this into their existing product rates, and while of course we’ll see an impact on discounts, trackers and variables, I’m not so sure we’re going to see increases in fixed product rates of 75 basis points as a result of this action.
That is partly to do with the fact that fixes are, for the main part, running far higher than Bank Base Rate anyway, and most lenders either rely solely on the capital markets for their funding, with swaps currently running a lot higher than BBR, or a combination of BBR and swaps to achieve their pricing models.
So, for example, if you are currently a first-time buyer with just a 5% deposit to put down and you are looking for a fixed-rate, then the likelihood is you’re going to be looking at longer terms in the high fives if you want the ‘best rate’.
As mentioned, these lower rates on offer are not on two-year fixed-rate products which might allow you to come out of these mortgages relatively quickly to, what might be, a very different market at the tail-end of 2024/start of 2025, but instead they are at least five-year deals, with some of the better rates on six-year products.
Prior to the base rate decision, I carried out a quick search online and found that, at that time, by far the best rates were for discounted products, however that would have been in anticipation of BBR going up, and subsequently the variable rate offered by these lenders. If you had a 5% deposit and wanted a two-year fix, the better rates started around the 6.4% mark, almost double what might be achievable with the better discounts.
However, this is of course, all relative, and first-time buyers in particular have historically looked to fixed-rate mortgages because they want certainty in their mortgage payments over the term, especially at a time when they needed to fund all other elements of buying/furnishing, etc, a first home.
That said, if there is a belief that rates may not now require raising by as much as first feared in the immediate aftermath of the ‘Mini Budget’, then a discount/variable or tracker – particularly over a shorter time frame – might actually mean you come out ahead of where fixes currently are, plus it does mean you get to reassess over a quicker time horizon.
Without doubt, this is a complex mortgage market to be dealing with, and in that sense, advisers are going to be called upon more than ever before. The problem however is that the one question first-time buyer clients often want answered, namely ‘What do you think rates will do next?’, simply can’t be answered and indeed it’s not in advisers’ best interests to even go there.
All anyone can do is play the cards as currently dealt, and the future will look after itself. What we do know is that the mortgage market can change very quickly – the last few weeks have shown us that – and the more stable the overall political and economic situation in the UK, the greater likelihood of a more stable mortgage market in which lenders can increase their product ranges and offer the most competitive rates they feel possible. After a period of incredible turbulence, perhaps this is the best we can all currently hope for.
