Mortgage Market Update – August

Welcome to our review of the month and a look at the themes that will affect the mortgage and property market going forwards.

This month I will leave brevity to one side and to dive straight into a controversial and complex topic – mortgage pricing and what opportunities that may hold – As we feel we may have found a gap in the market. Those of a non-geek disposition may wish to look away now, as some of these ideas and themes contained in this update are very complex, which are often best explained in person, however, if you really and truly want to understand this vital topic and how it may save you considerable sums of money over time, I hope you read on:

How can I beat the current rate rises?

As financial advisors, it is our job to talk you through all options available, gauge our clients risk appetite, and recommend a suitable structure of the loan from there. Sounds simple doesn’t it, but when we have hundreds of lenders to choose from, complex lending criteria, differing client priorities and tens of thousands of mortgage products available, that makes life harder, but manageable. What is hardest of all however, is predicting the future, which we are constantly asked to do. As what happens with the Bank of England Base Rate in the near term, has a huge impact on what we recommend our clients today.

We haven’t been through a period of sustained interest rate rises since the late 1990’s and indeed have got used to ultra-low interest rates since 2009, so forgive me a brief history lesson, but this is very relevant in the context of the point I wish to make and since these timeframes are either a distant memory for some of us, or news to others, I feel it is relevant in order to understand the point I wish to make.

What is the Gap we have spotted?

Pre-2009, lenders SVR’s (Standard Variable Rates – the average rate of lending all lenders set when your current deal ends) were broadly about 2-3% above the Bank of England Base rate, and so it had always been. That link was smashed due to the Credit Crunch in 2007 (you can see Margot Robbie’s explanation of this in The Big Short which is far more interesting than me explaining this yet again) and led to an era of ultra-low rates since then. What also happened in this period of sub 1% mortgage rates was that lenders did not decrease their Standard Variable Rates as much as the Bank of England had cut their benchmark rate, which meant it was not uncommon to see lenders SVR’s 4-5% above the Bank of England Base Rate. So far, so boring I can here you say, but this is interesting part:

Currently, in every ‘Best Buy’ table you see, Discount Mortgages will be the very cheapest on offer (indeed, see our research below which confirms this). A technical, but crucial point is that these ARE NOT Tracker mortgages. Tracker Mortgages are specifically linked to the Bank of England and have been the most common Variable rate mortgage you will have seen since the 90’s as they are clearer to understand. Indeed, we rarely recommended Discounts ourselves, until recently, as the RISK is that they may not go up in line with the Bank of England, they may go up more or less.

It is the latter point which is of interest. I have watched very closely this year and seen that lenders HAVE NOT increased their SVR’s as much as when the Base Rate has gone up, or not increased them at all. At first this was a surprise and hence why we were cautious of recommending Discounted products, but when I looked back at pricing pre-2009 it all made sense. Lenders can start to decrease this huge margin over Base to more long term norms, and if they do, which I believe they will, this then presents an opportunity as the current batch of Discounted Rates will prove cheaper over a 2 year period than a comparable fixed rate, and could even be cheaper than a 5 or 10 year fixed rate depending on where the Base Rate settles. As if SVR’s go back to being 2-3% above the Base Rate, not 4-5% as many are now, even when the Base Rate goes up, Discounts could well go up by less, increasing potential savings.

How Do The Numbers Work?

This is the way I look at it:

• The current best 2 Year Discount has a pay rate of 1.99%
• The current best 2 Year Fixed has a pay rate of 3.43%
  • This is a difference of 1.72%
  • set up fees are the same, so no difference on that side

On that basis, interest rates would need to go up by 3.44%+ in 2 years for you to lose out (the 1.72% saving x 2). Currently, money markets are predicting the UK Base Rate will top out at approx. 4% in the next 2 years. As the Base Rate is currently at 1.75%, that means we can expect rises of around 2.25% in the next 2 years, so on the above example, you win. The rate would start at 1.99% and be approx. 4.24% at the end of the 2 year period, but way below the level at which you have paid more interest over the same period, as you ‘win’ every month the rate you pay is under 3.43% (the best 2 year fixed rate available at the time).

This is NOT for everyone!

The above is all well and good on paper, but when you are gambling your mortgage payments, this will spin some heads. After all, we have thousands of product options for a reason, everyone is different and not everyone can or wants to get into such depth with their mortgage! Only a few geeks like me do in fairness, but then that is the point. It is our job to do this research and present to clients as applicable. If we do not feel it is appropriate, we’ll make that clear.

It is also worth nothing this simply isn’t an option for everyone. Of the lenders currently offering cheap Discounted Rates, they are typically smaller Building Societies, with more conservative lending criteria. So they want larger deposits and very vanilla clients. If you don’t tick those boxes, this may not even be an option before you get to the risk element.

Why not just take a long-term fixed rate?

If all the above has made you feel uncomfortable or anxious, then you should fix for the longer term. As I said at the top, it is our job to gauge our client’s risk appetites. I have always referred to Fixed Rate mortgages, and especially longer-term Fixed Rates such as 5 or 10 year products as ‘sleep at night’ options. You may end up paying more over the period, but if that helps you sleep at night, then it is the right fit for you. If you are already doing a big move, or gearing up to the max, you simply may want the certainty of a stable payment each month. In the backdrop of a Cost-of-Living Crisis, I can 100% understand why some people just won’t care about this. They see all their bills going up, and want certainty where they can get it, which is absolutely the right thing for I suspect the majority of clients.

However, some clients can and will take risks if they feel their is an upside. As what if rates don’t go as high as predicted? What if they even come down if we hit a hard recession? If you are of that school of thought, then this could be a far better option for you. Conversely, if you feel rate rises will continue, then a longer term fixed rate may well end up cheaper and you should do that. As we are in the “predicting the future mode” here, your opinion is quite frankly as equal as ours. The future is rarely what you expect, which is why this is so tough to call right now.

Summary:

The bottom line is – if you have a mortgage now, or are taking one out, you are likely to get a ‘Rate Shock’ in the future – as funding is highly likely going to be higher in the future compared to today, as all money markets are currently predicting that. So the fundamental question is – do I go with a variable rate now, save in the short term, and adjust to higher payments as they happen OR fix for whatever period you feel comfortable, kick the can down the road and just deal with that at the end of the fixed rate period?

Apologies for not having a happy ending, as I do financial advice not literature! This theory is laid out to hopefully save you money, or at the very least, realise that you do have to have higher payments at some stage, so do you want to stick or twist on your current strategy?

As I said at the top, this is best explained in person and any of our advisors would be delighted to talk this over in more detail with you and what is best suited to your specific circumstances.

Money Market & Mortgage Rates

• 2 Year money up 0.94% to 3.92%
• 5 Year money down 0.78% to 3.40%
• 3 Month Sterling Libor up 0.620% to 2.577%
• UK Base Rate up by 0.5% to 1.75%

Source – theice.com

Market Leading Mortgage Rates:

• 2 Year Fixed Rates from 3.43% (previously 3.24%)
• 5 Year Fixed Rates from 3.41% (previously 3.32%)
• Variable Rates from 1.99% (previously 1.77% – which is what is largely discussed above)
• Buy To Let Rates from 3.29% (previously 2.89%)