Looking beyond headline rates and fees and taking a holistic approach to mortgage advice helps to future-proof borrowers from shocks that they may encounter down the line.

Although only a fleeting moment in time, the volatility experienced following the mini-budget has served as a reminder of the importance of offering products and advice that considers the borrower’s place in what could be a vastly different market in the future. 

We knew that tax and regulatory revisions made five years ago would result in 2022 experiencing a rise in remortgaging but few would have expected borrowers to be finding new deals amidst the current economic uncertainty and for the introduction of the PRA’s then new underwriting standards to be so important to today’s market.  

The tightening of underwriting rules, announced in 2016 and introduced at the start of the following year, has helped to improve standards in the sector and should stand us in good stead to weather any economic downturn but the move also acted as an influence on borrower behaviour. 

Industry data highlights how the 2,973 five-year fixed-rate mortgages written in December 2016 increased to 4,086 by January 2017. Over the next year this number climbed to 10,902 as a result of the PRA’s measures making fixing for longer more appealing to borrowers to end the prior dominance of two-year fixes. 

The relative stability of the economy has helped the five-year fix reign supreme ever since, with the number of loans written each month surpassing 10,000 more often than not.  

The unwelcome mix of political and economic turmoil seen in the second half of the year disrupted this and has led to steep increases in the pricing of Swap rates. Far fewer options have been available to borrowers, particularly amongst fixed rate products. Even though Swap rates have fallen, and product availability has improved, on remortgaging a significant number of landlords have faced rates that were higher than when they locked into a fixed rate mortgage. 

In addition, the stress tests introduced as part of the PRA’s reforms have caused concern for today’s buy-to-let landlords. Expected interest rate rises resulted in an increase in Interest Coverage Ratio calculations – the rate at which lenders assess a borrower’s ability to afford mortgage repayments if rates increase in the future.  

A big enough increase could result in borrowers being stuck between a rock and a hard place – either raise rents above market rates to generate the additional revenue required to pass the stress test, or revert to their lender’s Standard Variable Rate product, likely more expensive than their original fixed rate.   

The stable economic environment experienced since the Global Financial Crisis (GFC) has meant that such scenarios have been relatively rare and those who have experienced them have escaped financially damaging changes to their mortgage due to interest rates remaining consistently low. But, as we’ve seen over the last few years, events that have the potential to cause seismic shifts in global financial systems are largely out of the control of individual institutions and can be just around the corner. 

With this in mind, the best mortgage advice looks beyond the present day. Yes, headline rates and fees are important but only considering the current cost of the loan could turn out to be a costly move if the borrower is left with no other option than to revert to an expensive SVR mortgage as a result of no product switch being offered by their lender when the current mortgage reaches maturity.   

Of course, brokers can only offer the products that are available at the time so lenders have a responsibility to provide future-proof products. 

And it’s not just potential interest rate rises that need to be considered. Using the proposed changes to EPC requirements as an example shows us that it’s feasible that a need could arise for landlords to take out further advances to fund costly upgrades to properties to comply with new regulations.   

And while we don’t have crystal balls to help us see how future markets could be shaped by government policy, global pandemics, or large-scale conflicts, we can work to provide customers with finance that offers an element of flexibility that could turn out to be more beneficial than it may appear today.   

Richard Rowntree is managing director, mortgages at Paragon Bank