The mortgage market was at the sharp edge of the political and economic turmoil in the UK during September and October, with mortgage deals withdrawn at an unprecedented rate and the cost of fixed-rate borrowing increasing sharply.
This was caused primarily by tax cuts announced in September’s mini-Budget, which led to mayhem in financial markets as the pound plummeted and there was a widespread selloff of government bonds, which in turn sent swap rates “doolally”, as one broker put it.
Keeping the base rate at 0.1% lasted too long and people became accustomed to low rates
In the immediate aftermath of this not-so-mini Budget, there was a virtual shutdown of the mortgage market, with lenders pulling deals across the board on the expectation the Bank of England would push up interest rates faster and further than previously expected.
High rates
The question now is whether this situation will improve after a change of government and an almost wholesale reversal of the mini-Budget. Unfortunately, most mortgage advisers say these actions are too little, too late for the mortgage market, with rates unlikely to lower significantly any time soon.
Shaw Financial Services founder and mortgage expert Lewis Shaw says the new chancellor may have rowed back on the tax cuts “but he can’t put the genie back in the bottle”.
Shaw adds: “Soundings from the Bank of England [BoE] suggest the base rate will rise. Higher mortgage rates are here for a while and the quicker we can recalibrate to this new world, the better.”
If even advisers are finding the current market a challenge, it is clear that borrowers need us more than ever
Brokers agree the mortgage market faces multiple challenges with fewer products available and higher rates stretching affordability at a time when inflated living costs are starting to bite. This issue could be further exacerbated by a dip in house prices next year.
Data from Moneyfacts shows how the mortgage market changed within just one month. Prior to the mini-Budget there were almost 4,000 residential mortgage products. One week after the mini-Budget there were just 2,258 products. This number has edged up since then, but still stands significantly below the number of products seen at the start of September, and well below the total available at the end of last year.
The picture is starker still when looking at rates. Moneyfacts says the average two-year fix (across all loan-to-values) was 4.24% at the start of September, with the average five-year fix standing at 4.33%. A month later, and a week after the mini-Budget, rates had jumped to an average of 5.43% for two-year fixes and 5.23% for five-year fixes.
The stamp duty changes will not help, especially in the North. It’s another gimmick that will help only those in London
These rates have continued climbing, despite corrective action to calm the markets by both the new chancellor and the BoE. By early October, average rates for both two- and five-year deals were above 6% — for the first time since 2010. At the time of writing, the average two-year fix is priced at 6.52% and the five-year fix at 6.36%
Most are laying the blame for this squarely on the former prime minister’s failed experiment with ‘Trussonomics’, although brokers point out rates have been on an upward trajectory throughout the year, albeit in a more orderly fashion.
‘Too little, too late’
Some brokers argue that earlier action by the BoE last year might have helped limit rate rises now.
Staton Mortgages director Mike Staton says: “The BoE needs to shoulder some responsibility. It was the first central bank to increase rates, due to fear of spiralling inflation, but at the time inflation had already increased to 5.1%. It was a case of too little, too late.
“Keeping the base rate at 0.1% lasted too long and people became accustomed to low rates. These low rates have driven activity in the housing market, pushing prices ever higher and potentially causing thousands of people to make rash, uneducated decisions with their own mortgage.”
Too many mistakes have been made and the foundations have been set for a recession and a housing market crash
Now that the economic situation looks more precarious, Staton adds, there is a fear that some consumers may live to regret these decisions in the years ahead.
Finanze head of bespoke finance Joshua Ellard agrees that earlier action by the BoE could have helped curb inflation, but he says the more recent rise in fixed-rate mortgage interest rates is largely due to events beyond the Bank’s control.
However, Ellard anticipates “a slight reduction in rates” in the coming weeks as the markets start to cool.
Others are less optimistic about rates heading downwards any time soon. Dimora Mortgages director Jamie Lennox says this is partly due to the high volume of business that lenders are dealing with, as homebuyers and remortgage customers rush to secure rates now ahead of any further increase in interest rates in November.
The true reflection of current issues will become apparent next spring
He says: “Borrowers might be hoping that unwinding the mini-Budget will result in lower mortgage rates again, but we just can’t see it happening. The damage is done. Lenders are now swamped with applications and, even if the outlook would appear to have improved, I doubt lenders will have the appetite to reduce rates while they struggle with countless applications.”
Simple Fast Mortgage principal Rob Peters agrees.
“Although some stability is returning to financial markets, I would not expect this to be reflected in cheaper mortgages as most lenders are struggling with large pipelines of applications and will be reluctant to encourage more with cheaper rates.”
Affordability
The higher rates are having a significant impact on affordability, particularly given the upwards march of property prices in recent years, and the fact borrowers are seeing other major outgoings increase dramatically, many of which will be factored in to lenders’ affordability calculations.
I don’t think we will see major price reductions, but more of a levelling-off over the next 12 to 18 months
Mortgages for Business head of residential Neil Bishop says: “With mortgage rates on the rise, lenders are having to restructure their internal stress tests and client affordability will be stretched.
“Some clients will find they are offered a lower LTV than before as a result, which may mean they simply can’t afford their desired purchase.”
This, he says, is likely to weaken demand, which could affect house prices. The question is: how big might this downturn be? Until recently, the market forecasts were for house price inflation to slow towards the end of the year, with Halifax, for example, predicting growth of around 1% for 2022.
Bishop is not anticipating an immediate fall in house prices.
“I don’t think we will see major price reductions, but more of a levelling-off over the next 12 to 18 months.”
The damage is done. Lenders are now swamped with applications
Given the rapid increase in recent years, he expects prices to come down to a more “reasonable level”, rather than crash.
“The property market will naturally die back as we head towards Christmas, and I think the true reflection of current issues will become apparent next spring. Savvy buyers will probably be hoping for prices to fall between now and then, so they can snap up a bargain!”
Others, though, are less confident of such a soft landing.
Staton says: “Too many mistakes have already been made and the foundations have been set for a recession and a housing market crash.”
He thinks this year will be the latest in a series of increasingly difficult ones for the mortgage industry.
Borrowers might be hoping that unwinding the mini-Budget will result in lower mortgage rates again, but we just can’t see it happening
“In 2020 and 2021 we had Covid to contend with; 2022 was the year of the energy crisis and cost-of-living issues; and 2023 may be the year of a housing market crash.”
Peters is similarly concerned about prices starting to fall across the market and thinks the situation could be worsened by conditions in the buy-to-let (BTL) sector. Although the rental market still looks strong, some landlords may struggle to refinance when fixed terms expire, particularly if they are over-leveraged, he says.
“Interest rates have increased significantly in a short period and lender stress tests are now based on much higher assumptions.”
Peters adds: “I expect this data to filter through in the coming months, showing more property sales, particularly from BTL landlords. This in turn will push down prices, but by how much is anyone’s guess.”
Lower house prices may, on the face of it, help would-be first-time buyers (FTBs) — although securing a mortgage will become more difficult with lenders likely to take a far more cautious approach to higher-LTV lending to avoid issues of negative equity.
The BoE needs to shoulder some responsibility
Falling prices will also create significant problems for the many thousands of residential homeowners looking to remortgage each year. Even without a downturn in prices, they face a big increase in mortgage costs.
In recent years, sub-3% deals have been commonplace, but when these expire the best deals are likely to be above 6%. But, if prices also fall, many homeowners looking to remortgage may find they no longer qualify for the best rates if they are now in a higher LTV bracket.
Many will find their monthly mortgage payments rocketing — and some may struggle to refinance at all, potentially forced onto even higher standard variable rates.
Concerns about the potential fallout from this prompted Martin Lewis, well known as the UK’s MoneySavingExpert, to call for advance action from regulators. He suggested intervention to compel lenders to offer more flexibility on term changes and payment holidays, along with higher minimum forbearance standards.
Lewis stated: “This needs investigating now, rather than waiting to see what happens; because, as recent evidence shows, prevention is better than cure.”
Lender stress tests are now based on much higher assumptions
Brokers agree that action could help cushion those likely to be most affected, such as people who bought near the top of the market at high LTVs, as well as those who may find affordability stretched due to a change in employment or other circumstances.
Newly imposed stress tests could make this problem worse, particularly in the homebuyer market.
Your Mortgage Decisions director Dominik Lipnicki says: “With so many uncertainties, stress tests really are a challenge; ensuring they are realistic and they provide the required safety check for responsible lending.”
Stamp duty
One ray of good news is that the new government has kept the stamp duty changes from the mini-Budget. But brokers remain sceptical whether this will help in any meaningful way.
Bishop says raising the level at which stamp duty is charged from £125,000 to £250,000, and increasing the FTB exemption to £425,000, “is a positive step”, but adds that, given the enormity of the economic crisis, the savings are likely to go mostly unnoticed.
I doubt lenders will have the appetite to reduce rates while they battle with applications
“It is a good policy — just at a bad time,” he says.
Hussain agrees that these changes will have “very little impact” at present. Others go further, dismissing the latest tinkering to stamp duty rules as “a gimmick”.
Staton says: “More needs to be done to help FTBs; without them the property chain will disappear. The stamp duty changes will not help, especially for buyers in the North. It’s another gimmick that will help only those in London.”
Navigating the current market remains difficult for brokers. Lennox says the chaotic economy has made it harder for them to ensure they give the right advice to clients. He thinks the government’s failure to get its own policies right is creating a “minefield” for brokers.
However, Lipnicki points out that the market turmoil underlines the valuable role brokers play in supporting customers and helping them to find the most appropriate and most cost-effective deals.
Borrowers need advisers more than ever
“If mortgage advisers are finding the current market a challenge, it is clear that borrowers need us more than ever,” he says.
In turbulent economic times, brokers have a fundamental part to play to ensure borrowers do not make rash decisions that could jeopardise their long-term financial future. The housing market may be slowing, but demand for broker services is likely to remain as high as ever.
