G-Rate expectations – Rising inflation, interest rates, mortgage pricing
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This week we look at how rising inflation is changing rate expectations of where interest rates may go this year, and what knock-on impact that will have on mortgage pricing. Inflation in the UK hit 5.4% at the highest level since 1992 which does have a direct impact on lending.
New Year’s resolutions holding up?
A couple of thoughts before starting. Firstly are your New Year’s resolutions holding up? We’re getting to the end of the month now. Many people do dry January and we’re 23 days in, how are you going? Are you doing the running and healthy eating, or all the things that you shouldn’t be doing? I must admit I nearly had a wobble this week with my daily exercise. I think it was minus three outside and if it hadn’t been for my dog giving me a bit of a nudge because he loves his morning run these days now, I probably would have buckled and stayed in bed. So something to be learned there.
Separately I managed to watch ‘Don’t Look Up’ on Netflix last night which was hysterical. If you haven’t seen it it’s definitely worth watching. Besides laughing, it really did get me thinking of how frighteningly accurate a lot of it was. I had images of that’s what a Number 10 Downing Street briefing looks like. If you don’t know what I mean by that watch the film and you’ll put the two together, it’s just disturbingly accurate.
Rising inflation, interest rates, mortgage pricing
Moving on from film reviews, let’s have a look at what is happening in the mortgage world and at rate expectations. One thing that is happening is that inflation keeps going up and the base rate was raised in December. However, it clearly hasn’t had the impact that people wanted.
What happens typically when there is these sort of changes in the market is that you get a range of views and predictions on rate expectations. What I’ve done for a very very long time now, when you look at particularly financial markets, is to look at credible data points. I tend to have a range of people and data that I look at, and then plant my opinion sort of in the middle. Which I know is a very unsexy way of doing things but it turns out pretty well, and if you’re not sure about that look at some of the old stuff I’ve done. I’ve actually been very proud lately of how my sort of predictions on rate expectations are cropping up. It’s all about credible data points. For example, if you’re getting vaccination information from Facebook, you’re probably not looking in the right place. It’s all about looking in the right place. I’ll give you an idea of how I judge things.
When I had a look at HSBC they were on the record last year as expecting the three base rate rises this year which seemed really bullish at the time but maybe not so much now. They have given very specific predictions as they expect the Bank of England to raise rates by a quarter percent in their February, May, and August meetings, meaning that at the end of 2022 the bank base rate will be 1%.
‘Returning inflation back to target’
I’m not sure I agree wholeheartedly with these predictions because besides the methodology I just explained, I looked at a recent speech from a new MPC committee member. The MPC is the monetary Policy Committee which is the rate-setting section at the Bank of England. There are nine members and the newest one is Catherine L Mann. (I love the use of the middle initial L there, it reminds me a lot of Michael J Fox. Why don’t we do that more often?) Catherine L Mann made a speech on the 21st of January which you’re very welcome to read online. (It’s on the Bank of England website but remember, I research these things so you don’t have to.
After 12 pages of notes and graphs and stuff, it alluded to the view that inflation will come back towards the target in what they called the mid-term, mid to sort of long term. Certainly last year the view was that inflation was transitory, meaning there was going to be a spike at the end of last year and then come back down this year. Clearly, that’s not going to happen so it’s something that policy members are going to deal with now.
As ever if you read anything from the Bank of England or from any sort of rate-setting person or policy adviser what you’re looking for tends to be a bit vague because they don’t want to be held out to dry too much. But if you read between the lines of what they said the HSBC approach is very ‘bullish’ and the Bank of England seem rather ‘doveish’. Meaning the Bank of England doesn’t think rates will go up quite that high.
One thing I did pick out that was very interesting is pretty much the last paragraph of the speech. It’s a very very interesting quote
‘in addition to the external forces of demand and supply that have loomed large in the evolution of UK inflation in 2021 going forward, there’s going to be another important external relevant factor for the UK economic performance. policy actions by other central banks have cross-border ramifications which will be important for the committee to consider but that is a topic for another speech.’
Nice little cliffhanger Catherine. What that’s saying in English is that if other European or American or really any sort of western democracies start raising interest rates it will be difficult for us not to. This is a big indicator of what the Bank of England is looking at. So one thing I will be keeping an eye on is other Central Banks raising interest rates or not. (That’s why I do read 12 pages of notes to get these little gems, again so you don’t have to.
What does this mean for mortgage rates?
What does that mean in the real practical sense if you’re looking to get a mortgage anytime soon? What are the rate expectations?
Firstly one thing that is really important to understand when interest rates are looking to rise is that banks move their products ahead of when the Bank of England is going to raise rates.
A very specific example to illustrate this is that mortgage rates hit the lowest point ever in September last year. September 21 is when rates were at their very very lowest and just to pick out an example here the best five-year fixed rate deal you could get in September 21 was 0.91%. Today the best you can get is 1.44% for the very same product. That’s a 0.53% rise when the Bank of England has only increased rates by 0.15%. This supports the point I’m trying to drive home which is that banks are going to raise the rates of their products well ahead of the Bank of England raising interest rates. We’re seeing it really week-on-week currently where rates are going up by around 0.05%, 0.1% here and there, and it happens over time. If you were quoted back in the summer and offered a sub 1% rate,the only sub 1% rates now are variable products which we probably wouldn’t recommend.
Something specific you can do if you looking to refinance this year, if your remortgage is coming up for renewal this year, you can book your product six months ahead.
That’s why we’re contacting our clients now because you can imagine if all these things are true and there’s not much argument about rate expectations and about rates going to go up, it’s just by how much and when, if a client can book a rate today that’s more or less guaranteed to be cheaper than it will be in six months time when their deals up, its best not to leave it late. Please talk to a qualified mortgage advisor, better still talk to us.
It’s not all bad news, rates aren’t creeping up across the board. Another dynamic is that if you got a smaller deposit so 5% or 10% deposit those rates were actually coming down still.
A specific example, in the budget back in April last year the government announced a guarantee for 95% mortgages. What that meant was they would pick up any losses if banks made losses in that area. So a guarantee, it’s not funding, they would pick up the slack it that went wrong. That got lenders lending back at 95% because they weren’t doing it because of Covid. The product rates you could have got around the time were sort of 5%, 4.95%, 5.05% in that sort of area. Today the best 95% mortgage you can get is 2.5% for a five-year fixed, so prices have halved.
A really old-school sort of banking analogy for you is that if you’ve got an average mortgage rate, it’s normally about 1% above the cost of funds. If the Bank of England is at 0.25% today, and if your situation is nice straightforward, you should be really paying a mortgage rate at 1.25%. If it’s super-low-risk, so a really great situation for you and really low percentages that property you’re buying at you might be under 1% and you might well pay over 1% if it’s deemed a bit riskier so there have been any credit issues in the past for smaller deposit. Always a nice little benchmark. The mortgage rate you get is roughly about 1% above where the Bank of England base rate would be. Worth keeping eye on. But it’s good to see that if you/ve got the high-risk loans in that small deposit area, the costs are still coming down.
Market rates
What does that mean with market rates? Unsurprisingly market rates were up last week, seeing what’s happening inflation continuing. Five-year money is at 1.22%, two-year money is at 1.17% and LIBOR is at .561%. Pretty much everyone there predicting that interest rates will be rising over the next three months, two years, or five years depending on the window you’re looking at.
How that translates into best mortgage rates, the five-year deal being 1.44%, the 2-year you fixed rate is at 1.29%, and the best tracker is at 0.99%.
The rate you will be offered will be dependent on your situation and deposit, but these are the benchmark rates and certainly the market-leading ratas and then we work backward from there.
Source: Twenty7Tec January 2022
If you want more mortgage advice or views on rate expectations to ensure you get the best mortgage product for you please contact us.