It really has been a rollercoaster ride in the mortgage world and, to give you an idea, mortgage rates are now at least 1% higher than they were a month ago – it has been that crazy.
Not only have the days of the 3% mortgage gone, but 4% fixed-rate mortgages are now no longer, and, with the very odd exception of a retention product fixed for 10 years, all fixes now start with at least a 5.
Two-year fixes are the biggest movers and even the very best rates are in the high 5% bracket or now starting with a 6.
Five-year fixes have fared a touch better with ten-year fixes now offering the cheapest options, although they have the longest penalty tie-in periods.
Whilst the latest rate rises do have their roots in the aftereffects of the disastrous mini budget back in September which caused rates to rise faster than expected and left the financial markets more susceptible to further issues, this time it is more to do with the stickiness of inflation, media reporting, and lenders capacity.
A month ago, the inflation report was a lot worse than expected, showing that inflation seemingly had no intention of going anywhere fast. This prompted the Bank of England to increase the Bank Base rate by a further 0.5% to now stand at 5% and caused a wave of expectation that they would have to increase rates further than thought to 6% or even higher.
This sent the markets into overdrive, forcing up SWAP rates, (the future cost of money upon which lenders base their fixed rate pricing), and thus lenders had no choice but to reprice upwards.
Because SWAP rates were changing so quickly, lenders often changed rates dramatically with little or no notice, exacerbating the issue as borrowers and brokers had to submit applications in almost impossibly short time periods.
The resulting media frenzy led many people to, justifiably in the circumstances, panic and bring forward their mortgage decisions in order to try to fix before rates rose further.
The combined effect was a vicious circle of lenders having to react to SWAP rate rises giving relatively short-notice periods of that change, and borrowers rushing to grab those rates. This in turn put a massive strain on lenders with the cheapest rates who get inundated and have to put rates up further to protect their people and service.
It is massively hard to navigate for everyone, especially clients, who need to make quick decisions in these circumstances, whilst brokers are working round the clock to try to lock into these rates.
This all meant mortgage rates increased faster and higher.
In the past week, however, we have had some promising news with the latest inflation report showing that inflation actually fell more than expected last month, from 8.7% to 7.9%, whilst more importantly, core inflation also fell.
These latest figures will come as a relief to everyone, and whilst we are not out of the woods as yet, we have at least reached a clearing where we can safely pitch our tents and rest.
I suspect we will see a slight reprieve as SWAP rates ease a touch with the prospect that we are now closer to the top of the interest rate cycle than thought a few weeks ago.
I do believe that the Bank of England must now exercise some restraint and certainly, the expectation now is that the next rise in August maybe 0.25%, with the peak coming at 5.5% rather than 6% or higher.
For the Bank of England to continue to blindly follow a course of action that could well do more harm than good makes no sense to me. We know it takes time for rate increases to filter through the system and the last thing people need is more fuel heaped onto the fire of rising monthly expenses.
Mortgage holders will be hoping common sense prevails and the Bank does not go further at this moment in time.
Whilst this may not yet mean we see a wholesale fall in mortgage rates, lenders should at least now move away from sudden rate hikes and also enjoy a period of calm reflection.
It does show just how difficult it is to call the market, and we, therefore, find ourselves for the foreseeable future in a period where mortgage rates are 5% to 6% and borrowers need to adjust to the new normal.
This is easier for purchasers, especially those comparing mortgage payments to their rental payments, and I do expect purchases to continue throughout the rest of the year as the social reasons behind the demand for property are still strong and house prices will continue to ease, dropping around 10% over the year as a whole at most.
Those remortgaging, however, are experiencing payment shock as they look at their mortgage rates going up 4% to 5% from where they were previously.
We are seeing clients who are now facing monthly mortgage payments that are increasing by over £500 per month, some over £1,000 and are worried about what they are going to do.
This will stabilise in time, but until then there are tools in our broker’s box to help mitigate these changes. For most of our clients so far, we have often been able to help mitigate the effects of this by speaking to clients early and putting a plan in place.
Although this is not “usual” advice, there are tools that can be used, for example, extending the mortgage term. This helps to spread the cost over a longer period and bring down the monthly payments, for example, moving from a 15-year term to a 22-year term.
Where clients are lucky enough to have savings, we are seeing more use these to pay down as much of the loan as they can, but we have also been looking at offset mortgages where savings can be used to bring down payments without losing access to those savings if needed.
Borrowers can also look at moving all, or more sensibly part, of the mortgage to an interest-only basis. This strategy has to be advised properly with key future review dates planned but has worked very effectively for some clients. It will mean that more interest is paid over the term of the loan, however, borrowers are more concerned with monthly payments at this moment in time.
Lenders are also being diligent and looking at similar options if needed, especially now with the introduction of The Mortgage Charter, but the main message is to get advice early and formulate a plan rather than putting your head in the sand and hoping rates will fall.
We think rates will be higher for longer now and so getting ahead of the issue we have found puts our clients in a much better headspace and often realise they can adapt to the new world.
Usually, we would contact our clients six months before their rate expires to start reviewing the market and looking for a new product, but we are now moving to nine months before. This gives us time to look at budget planners, formulate a plan and give our clients as much peace of mind as possible.
In the meantime, please do not hesitate to contact us with any questions, worries, or issues at any time. Our friendly, down-to-earth advisers are here for you, and you can contact them here.