Mortgage Chaos: Are We Getting to the Peak?
The mortgage industry has been in turmoil for months now, interest rates increasing with alarming regularity and as of June 2023 the base rate is set at 5% with no indication of it coming down anytime soon.
So if your remortgage is coming up or you’re looking to buy a property in the near future, this is likely already raising your heart rate as you’re worried about how massively it’s going to impact your monthly repayments.
If you’re a landlord you may well be at even greater risk because while rents are on the up, that also means that your risk of rental rears is on the up too. So we spoke with Stephen Smith who’s a non-executive director and consultant in financial services with 40 years experience in the mortgage industry, to talk through the current mortgage climate.
There is a bright side, according to Stephen as, if we are ‘in the middle’ of a troubled market, that does imply we’re perhaps on our way out of it, through to the other side. However, he is troubled that the degree of difficulty that we’re seeing in the market could go on for some time, at least until we get some sort of stability with a clear view that inflation really is under control.
The figures that are released on the 21st June showed that the level of inflation is seemingly stuck both at the headline level and at the core inflation level – and that’s not good. So, as a result, the bond market hits and therefore, the swap markets from which lenders price their products rose even before the Bank of England decision on rates on the 22nd June, where they decided on a half a percent rise rather than the quarter percent rise.
The base rate therefore now stands at 5% and the more mortgage rates that are priced off that, and the swap market, are now generally over 6%. A typical two-year fix will now be around 6.2% and the view remains in the City that base rates will still have to rise slightly further with the markets predicting a peak of 5.5% or even 6% by the end of the year.
Back in 1979, Stephen remembers that rates rose by 3.5% in one movement and that certainly sent a message to the market and altered consumer behaviour, so there is an argument for a larger increase, rather than incremental ones.
How did we get to this point?
Last year’s Truss mini autumn budget was a huge shock to the system and then rates gave a compulsive leap. Then, of course, there was yet another Prime Minister and Chancellor, but there was a view that things would be more stable; rates were rising, but in a relatively steady and controlled manner.
However, that stability depends on government and Bank of England actions getting inflation under control and the data in the first half of this year has shown that that’s not really happening.
Inflation data combined with data on wage growth – which is currently running about 7% – and low unemployment, meaning that employees have strong wage negotiation power, has made the markets think that inflation isn’t being controlled or brought down so bond rates have risen and swap rates have also risen. This is the market that lenders use to offset their risk of fixed rate lending and they give a view on the future level of interest rates.
Mortgage market turmoil
There’s been turmoil as lenders have been forced to withdraw whole product ranges and then reprice and relaunch to avoid being blown up by amounts of applications. So the number of products available on the markets fallen and this has made it very difficult for brokers and borrowers over the last few weeks.
To back that up, Jeremy Hunt made it clear in announcements on the 20th June that there is not going to be any direct government intervention, like with energy bills, that we saw or like the furlough support during the pandemic, because the rate risers are doing exactly what they’re supposed to be doing; taking money out of the economy hoping to slow it down, hoping to slow inflation down. So any government direct support would just be adding to the problem, not providing a solution.
What can we learn from history?
There’s been a lot of older people saying that they had much higher interest rates in the past, so they don’t feel that this generation of home buyers have much to complain about.
But the difference is in how much people have had to borrow to buy a house. So instead of 3 times your income, or possibly 3.5-4 times your income, that people enjoyed in the late 1980s, the price of houses now means that you’ve probably had to borrow well over 6 times your income – possibly even more!
The maths on that shows that a 6% mortgage rate now is actually the equivalent to a 13% mortgage rate back then, in terms of the proportion of your pay you’re using.
The amount of the borrower’s take-home pay being used on the mortgage payments could soon rise to some of the highest levels ever, so in reality things are just about as bad as they were back in the late 1980s – in fact, they are arguably worse!
How are tenants affected by the increases?
Rents have been rising at double-digit rates.
The average UK tenant now pays around 28% of their pay before tax on rent. That’s a 1.5% increase in the last two years and it’s standing at the highest level for 10 years. That’s just the national average; in London and other big cities like Bristol place, the level will be far higher than that.
So it’s no wonder that many people renting can’t afford to save for a deposit!
Is there any good news?
Many mortgage borrowers are on fixed rates and if they’re not coming to the end of their fixed rate this year or next they should be well protected against this market turmoil – or at least until their fixed rate ends.
However, that does mean that the pain is very focused on around 2.5million borrowers, including those on variable rates or people who are having to refinance this year or next, as well as new home buyers and tenants are going to pay increased rent to support their landlord’s riding costs.
It’s young adults in the 30-40 age group who will be worse hit, being more recently into the market with higher loads of values and bigger mortgages.
How are landlords affected?
Most landlords will be on fixed rate deals and they should be well protected against the current market rises, but for those looking to buy for the first time or who have a fixed rate mortgage deal that’s coming to an end, this really does matter.
Overall the UK mortgage market is in a much better state than just after the great financial crisis in 2008. The FCA put some data out last week that shows that over 80% of mortgage borrowers are on fixed rates, so not immediately affected by base rate changes.
It’s also worth bearing in mind that only around 1% of customers are in arrears compared to 3.3% in 2009.
The average homeowner looking to remortgage currently has about a 50% loan to value and lenders overall have a under 10% of their outstanding mortgages at over 75% loan to value, so the FCA says this puts the market overall in a significantly stronger position than even a few years ago.
Landlords who have multiple properties and mortgages should review their portfolios to ensure that they’re on the lowest possible loads of values across the whole portfolio, as that will mean they’ll benefit from the lowest possible rates.
Talking to a broker would help a lot with that!
Where do we go from here in terms of mortgage borrowing?
There’s little the government can do here apart from leaning on lenders to make sure they treat customers who are having payment difficulties with understanding and forbearance as they face the cost of living challenges.
Following a meeting between the Chancellor and the largest mortgage lenders on the 23rd June, an agreement was reached for lenders to allow customers to rearrange mortgages over longer terms or by going into an interest-only mortgage, critically without affecting the customer’s credit rating. It’s called a Mortgage Charter and you read more on the government’s website.
Lenders have also agreed not to take repossession action until at least 12 months after arrears have first arisen.
There has been a reduction in asking price being achieved and people are perhaps being a bit more realistic in what they’re able to sell for, but it seems inevitable that the market will cool in coming months. More properties could come onto the market perhaps, if more recent buyers decide that they just can’t afford homeownership anymore. There may also be some landlords exiting the market, but Stephen doesn’t feel we’re heading for anything you would consider a crash.
What’s the best advice for someone looking for a new deal?
Firstly, if you think you’re going to have the difficulties, talk to your lender sooner rather than later. They’ll tell you what they can do to help and together you can sort out a plan.
Some of the new forbearance agreed with the Chancellor is dependent on customers contacting lenders before they get into difficulties, rather than when they already are, so talk to your lender at the earliest opportunity.
Secondly, if you’re going to need to refinance or you’re looking to buy, please speak to a mortgage broker they can advise on all the deals available in the market, not just those you may have seen in the papers, and they often have access to mortgage deals that you can’t find on high streets.
More generally though Stephen recommends you sit tight for as long as possible, as we must be getting near to the peak of interest rates or at least near to it. If you don’t have to move your mortgage or refinance then don’t yet. In the short term things may get a little worse, but as soon as it looks like inflation is being brought under control swap rates and therefore mortgage rates should start to stabilise and fall.
Can younger people rely on the Bank of Mum and Dad?
Research by a company called Salter, the wealth management company, found that the bank of mum and dad, which has traditionally helped out children with the deposit they need to buy a house, has been broadening its activities and they’re now also helping meet monthly mortgage bills and mortgage repayments.
Apparently around a quarter of parents are seemingly doing this. It’s a real sign of the times.
Perhaps this situation may lead us all to think that longer term fixed rates, around 10-15 years. These can be a little bit more expensive, but they can provide a solution to the stresses and strains of the roller coaster market that we currently see. So in future maybe 10+ years fixed rates might be more common.