In an industry that never stands still, it’s fair to say we’re all always busy.
Over the last few years with funding prices at record lows, lenders have been part of a cat and mouse rate war trying to sustainably price mortgages to offer good long-term value to borrowers while maintaining service in an ever-changing environment.
Then, as there is now, rates changed regularly, products were pulled and brokers felt they were chasing their tails to keep up.
Rate pulls are less of a challenge when pricing is falling or flat, but the tables have now turned. It’s still as busy, deals are still appearing and disappearing fast but as we all know, rates are far from the lows we’ve seen in recent years.
And with this upward trend comes additional pressure to act fast to minimise the repercussions for clients and lenders. I can really appreciate the frustrations brokers feel when products promised to clients are then increased before applications are submitted. As a lender, we really do try to hold off or give as much notice as possible when it’s necessary, normally at least 24 hours, but I know that doesn’t always help in the moment.
Lenders’ current challenges stem from the speed and size of the daily fluctuations which, if not acted upon, could turn a range to loss leading within a couple of days. Daily increases of 30 basis points (0.30%) are not unusual at the moment and following the chancellor’s mini budget (23 September) we actually saw a daily rise of 100 basis points (1.00%).
It may also help to understand how and why mortgage rates are increasing at pace.
I regularly see and hear many people conflate Bank of England base rate rises to mortgage rates, which then begs the question why lenders are putting rates up by more than those making the Bank’s decision on Threadneedle Street.
In reality, the latest base rate increase – and all those before it – only really directly affect variable rate mortgages, or trackers, so-called because they’re priced by tracking the base rate plus a percentage determined by lenders. With roughly 80% of borrowers on fixed rate mortgages though, that’s four in five cases priced on other factors.
Usually, a lender’s funding comes through a combination of wholesale markets, government funding schemes, and in our case as a building society, through members’ savings.
Usually, a lender’s funding comes through a combination of wholesale markets, government funding schemes, and in our case as a building society, through members’ savings.
While this combination of diverse methods provides greater stability to lenders, their individual makeup is fluid, often volatile, and can change quickly depending on how the markets are performing.
The cost of borrowing for lenders, and therefore the funding of mortgages, has increased drastically in recent months as a result of economic influences. Russia’s decision to invade Ukraine, the energy crisis, the need to curb inflation and the recent mini budget announcement are all amongst many factors having a knock-on impact and forcing lenders to price, not for excess profit, but in many cases to avoid losses.
To put it simply, Bank base rate has gone up by 2.15% in the last 12 months (from 0.10% to 2.25%), but two-year swap rates – which drive funding costs for fixed rate mortgages – have gone up by 5.10% (from 0.44% to 5.56% as at 26 September).
It’s also really important that we don’t become out of step with the market, as rates that don’t follow the rest can leave lenders open to being swamped with applications as clients push you to get them the best deals. This can then lead to service delays or what can seem like knee-jerk product withdrawals, so it’s a fine balance for lenders to price right in a fast-moving market while delivering the value borrowers need.
Given many forecasts suspect we’ll be in this rising rate environment for the foreseeable future, it’s important we all continue to work together as much as possible.
Packaging a case to lender’s requirements and submitting documents all at once for example, can often go some way to avoiding delays and helping you to get the rates you’ve promised to clients, while lenders too need to play their part in communicating when and why changes to ranges need to be made.
The more collaborative we can all continue to be, the more we’ll be able to help borrowers through what’s shaping up to be increasingly difficult times for homeowners.
Jeremy Duncombe is managing director at Accord Mortgages
