NB: this article was written before Government postponed the budget from 31 October until 17 November.
As we spiral into our third Prime Minister this year, avoiding a return of Lazarus proportions, the mortgage industry is caught in the crossfire of a vicious escalation in interest rates which has made the calm of the last decade recede quickly to be a distant memory.
It is to be hoped that a new government, put in place quickly, will allow the 31 October budget statement and the subsequent Bank of England base rate announcements to provide the stability that markets need.
With Swap rates and Gilt rates, at time of writing, now all starting with a four, it is difficult for lenders to offer out a fixed rate at something that starts with less than a six. Whilst Standard Variable Rates and Revert to Rates have yet to move in line with market rates, the decisions of the Bank of England will set the tone of the market for the coming months.
Tracker rates continue to offer the best prices in the market, and brokers are working hard to ensure that these come with no exit penalties and with good administration, which is essential. The ability of the lender and the conveyancing world to act “fleet-of-foot” will be a necessity in a world where interest rates choices are liable to be even more chaotic well into 2023.
Market reaction
What is likely to happen is that many lenders might choose to “protect” their existing book. I can see a widening situation where the best fixed rates on offer might only be available as product transfers. With almost £400bn of fixed rate mortgages maturing in the next 15 months, all of these millions of customers will need advice.
However, lenders might make it very easy to stay with them, without any benefit to their broker partners. I would encourage them to consider this carefully as we move into the new world under Consumer Duty and the need for providers and distributors to fully set out their individual and mutual service proposition.
It is important that lenders ensure there is a healthy advice sector at the end of this crisis. Lenders still have a need to lend, will have sales targets and ideas on product development in 2023. We will need to work together to ensure customers get the right deals and we collaborate to move out of this crisis, which was made by Putin but has been made worse by politics.
The Broker Community
The broker community has been outstanding in recent weeks providing bespoke advice based on consumers’ individual circumstances to keep them in the best financial position and in their homes. Blanket statements by some industry commentators suggesting reverting to SVR has added fuel to the fire and was exceptionally unhelpful. It is critical that consumers take advice from qualified experts who have the appropriate qualifications and regulatory permissions.
For those consumers who are already struggling with the cost of living crisis it is essential that they take advice from a broker and have honest and meaningful conversations with their lender. Those lender discussions are already being positioned following a series of “Dear Chief Executive” letters that they all have received. The FCA has made their expectations clear. They expect that lenders will have increased their capacity and ability to speak to “distressed customers”. The guidance makes it clear that taking possession of any property should be the last resort.
Good discussions on budgeting and realistic assessments of options are expected to be the norm. The use of temporary or more permanent interest only options should be part of every lender’s armoury. For some borrowers who are in trouble, the use of term extensions might work, but the implications must be understood by the customer. The debate over blanket “payment deferral” options as employed during the Covid crisis is not on the table, but for some customers, on a case-by-case basis, it might be the best solution.
For some, the option of having to sell up might appear to be best advice. However, given the issues we see in the Buy-to-Let market this might be less viable than many regulators and commentators might think. In addition, Housing Associations and local authorities continue to be besieged with a level of demand for properties that they cannot satisfy.
For brokers, managing the engorged pipeline they are sitting on is essential. The conveyancing world has not recovered from the stresses of the two Stamp Duty cliff edges and one significant player encountering a major cyber-attack. Although they are trying to restore a semblance of order, it is a struggle to find timely solutions. With lenders now unlikely to extend offers, it is incumbent on all brokers to work with their customers and the conveyancing sector to prioritise transactions close to deadline and get them over the line. All brokers should be looking at their pipeline and setting out a timetable that means they get active on all cases with two weeks of the offer expiring.
Facing the future
What happens to both Bank of England Base Rate and to the UK inflation rate will dictate where we go on mortgage rates over the next few quarters. Whilst some “doomsayers” have been predicting base rate closing in on 6% in the middle of 2023, there are other trajectories which could see it settle much lower.
If what has been supply led inflation, driven mainly by oil and gas price shocks and supply chain issues from regular Covid driven Chinese lockdowns, departs quickly from the inflation figures, then it is possible that we will see base rate peaking at less than 5%. In addition, if the Chancellor gets approval from the Office of Budget Responsibility, then we will see gilt and swap rates fall back.
Whilst we are a long way from the below 2% rates we had seen in 2021 and 2022, a market more normalised in the 4% to 5% range has quite a high degree of probability. Keeping calm, listening to customers to establish their priorities and delivering clear advice will be essential.
There are also a number of dynamics that are different to previous times of trouble. Our main banks and lenders remain well capitalised. As they have been strictly limiting the amount of interest only loans, the preponderance of repayments loans has colluded with house price inflation to significantly improve lenders overall book loan to value ratio.
In addition to this, with the levels of stress testing on committed expenditure against proven income, there should be margins for most mortgage holders to make decisions about how they allocate their remaining discretionary surplus. There is no imminent risk of high levels of unemployment, indeed the bigger risk is inflation generated by the chronic shortage of people to fill the record number of vacancies in the UK economy.
Testing Times
This is not to say that there are no headwinds. The rising cost of powering our homes and businesses is painful. Increasing mortgage and rental payments will impact more people over time. Food inflation appears to be close to 15% per annum. The likelihood that benefits will not rise at the rate of inflation will make life harder for those most desperate.
One sector that is struggling with these changes is the Buy-to-Let sector particularly in the South where rental yields now do not fit the required affordability stresses. This is a hot topic with the Bank of England and the PRA, as we need a vibrant private rental sector to keep roofs over people’s heads.
Finally, my last concern is if rates stay higher for longer, then where do we go in the lifetime mortgage sector? When rates were under 3.5%, compounding interest meant the debt doubled every 20 years. With rates at 7% it doubles every 10 years. This will impact the valuations provided and the cost of the no negative equity guarantee will reduce the capital amounts available. Where this product is being used for debt consolidation or meeting day-to-day living costs, very careful consideration needs to take place as to whether this is the right solution for people who may be vulnerable and at what age they should commence use of this product.
Whichever way the market goes, it is critical that consumers engage to find the best solutions via an adviser.
