Mortgages in Turbulent Times

Today’s blog is by ​​Stephen Smith, a non-executive director and consultant in financial services, with 40 years experience in the mortgage industry. He joined us on Friday 4th November for a deep dive into the current economic turmoil, so be sure to watch the replay!

What is the best advice regarding mortgages right now?

I have two pieces of advice for anyone – homebuyer or buy-to-let landlord trying to arrange a mortgage in these turbulent times:

  • Don’t rush
  • Speak to a mortgage broker

The first of these is because the market is moving so fast that if you jump for a deal you may lock in to something that looks good today, but you may soon regret. 

The second is because the mortgage market has never, ever, been so complicated.  Only a well informed mortgage broker will be able to track down the best deals for you and be able to compare them with other market offerings.  And they’ll know exactly how to lock in to these rates with any lender.

What do these turbulent times mean for landlords?

Mortgage rates in the UK have actually been on the way up since the beginning of this year, with two year fixed rates, which had been widely available at around 1.5% for the last few years rising to around 3.5% by June.  

But the shock given to the markets by the disastrous mini-budget on the 23rd September, together with further international inflationary pressures made two year fixed rates leap to the 6.5% we saw in October, with five year fixes on a little less, at around 6.4%.  

These are the highest rates the market has seen since 2008.  

So for new buyers, things have just got a whole lot more difficult, and budgets already stretched by the cost-of-living pressures may not be enough and the buying decision may have to be put off for a few more years.  

Existing borrowers face difficulties too.  

Only around 17% of current mortgage borrowers are on variable rates, and they will face immediate rises in monthly payments. The other 83% are on fixed rates according to The Bank of England.

Whilst this may mean that most borrowers won’t face an immediate payment shock, there will be a shock that just unwinds over a period of time. It is estimated that around 1.8 million mortgages will reach the end of their fixed rate terms during 2023 and will require refinancing. Refinancing at rates perhaps three times their current rates.  

A recent report from The Resolution Foundation, looking further ahead, says that by the end of 2024 over five million UK households will be paying a lot more for their mortgages than now. On average, across the UK, this will amount to around an additional £3,500 per year, but in London, this figure is £5,500.

In the market turmoil following the 23rd September ‘fiscal event’ all mortgage lenders withdrew their products and for some time they really did not know how to price them. The market which they, as lenders, rely upon to manage the risk of their lending, the swaps market, had been pricing in the Bank of England base rate peaking at just under 6% in June next year, up more than 3% from where it is today.  

The consequent effect is to produce the 6.5% mortgage rates we saw in the market. There are some signs that the curve could now be flattening, and the peak reducing slightly, but I think that mortgage borrowers will have to get used to two- and five-year fixed rates being in the 5.0% to 6.0% range for some time to come

Will political change make a positive difference?

An ending to the political uncertainty may take some of the volatility out of the market, but will leave rates much higher than they were expected to get to only a few short months ago.  Mortgage lenders may be slow to reduce their rates, even when market rates start to fall, building in a ‘uncertainty premium’ as they go.  

So, for both new borrowers and those looking to refinance their maturing fixed rate deals, try not to rush. Lenders will contact borrowers with expiring deals, anything from three to six months before the effective date, but the product transfer deals they offer may require commitment when taken, and that might not be the best thing if the market is still moving.  

Some borrowers may like the idea of changing for a time to a variable rate (typically a tracker) with no early redemption penalties, retaining the ability to jump to an attractive new fixed rate deal if these become available.  

This is where a good mortgage adviser is needed. All the mortgage professionals I have worked with in my career use a broker themselves at critical times such as these, to get the very best market view.  So, don’t rush, and get advice!

You can book a call with one of Mashroom’s expert advisors to get the advice you need.

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