A word on the mortgage market July 2022

Hello and a (really) warm welcome to the latest edition of A Word on the Mortgage Market. Indeed, as we write this from Mortgageforce Towers, it’s rather warm. Still, we’re not going to complain about the weather. Long may it continue.

This month we’re ruthlessly focused on the state of the mortgage market; what’s happening, what do the next few months look like and what, if anything, should you do about it. Let’s jump in.

Everything is rising (in case you missed it)

Unless you’ve been locked in a dark room for many weeks (and who could blame you if you have taken that approach), you’ll be only too aware that everything is going up. And interest rates are no exception. There are a number of factors at play here, but the critical one is the need to control the rampant inflation we are witnessing. At the time of writing, UK inflation stands at 9.1%, that’s 7.1% more than the bank’s annual target of 2%. Punchy, to say the least.

Many things go into the inflation calculation, but chief amongst them is the cost of fuel. At this point last year, oil was $62 a barrel. It’s now an eye-watering $104 a barrel. And just when you thought it couldn’t get any worse, it does. Because sterling is currently taking a battering against the dollar (£1 would get you $1.35 in February this year, whereas now it is just $1.20). And we pay for our oil in, you guessed it, dollars. In addition, wage inflationary pressure is building with the lack of workers to fill certain jobs in sectors like hospitality, airlines and fruit picking.

The phrase is the perfect storm, although it’s anything but perfect. And, finally, the ongoing war in Ukraine compounds everything. Markets hate uncertainty. Big time.

And mortgage rates are rising. Quickly.

A reminder (although you probably don’t need one) that the Bank of England Base Rate has moved from 0.1% in November 2021 to 1.25%. Now, of course, this is still really low in the general scheme of things, but we understand that the general direction of travel is concerning.

Now, while bank rate is important, we like to look at SWAP rates to give a better indication of what will happen to mortgage rates specifically. SWAP rates are the rate that banks lend to each other on and are a key determiner of the price of fixed rate mortgages. This time last year, 2-year SWAPs were just 0.18%. Today they stand at 2.69%. For 5-years it’s an equally upward story, rising from 0.40% to 2.41%. So, it’s no surprise that actual mortgage rates are on the move upward.

Yet, it’s not just the rates that we have to factor in. We’ve spoken before about processing capacity and service levels, and they remain a key factor. All lenders are under enormous pressure with processing times double or even three times what they were a year ago and even during the pandemic. The only way lenders can control volume is by putting up rates to make themselves uncompetitive. Of course, this works the other way, on occasion, where lenders have reduced rates to get more! But this is undoubtedly the reason why mortgage rates have risen with greater pace than most of us anticipated.

If you are due to come off a fixed rate soon then you are probably facing a rise of anywhere between 1& and 1.5% so it is worth speaking with your adviser as early as possible. They’ll know whether you should remortgage to a new lender or take a product transfer rate with your existing lender, as well as lender service levels.

So where are rates going next and what should you do?

It’s all but a certainty that we will see more rises in bank rate in the mediumterm. Trying to predict the future is notoriously difficult, but we reckon we’ll be at 2% by the end of the year. As for 2023, it really is anyone’s guess.

A few things to consider. Will there still be war in Ukraine? If not, things will get better. If the UK and the wider world goes into recession, we will see oil prices drop. The UK inflation rate will ease as the recent increases will drop off the Consumer Price Index (CPI) numbers that drive the inflation statistics. And will the government risk bank base going to 3% and the effect it will have on the economy and borrowers? And it is feasible that the government could set new inflation targets that would mean the Bank of England could ease off on rate rises. Albeit pretty unlikely.

As ever, there is never one size that fits all, so getting personal advice from your adviser really is the only sensible route to take. Having literally just said that one size doesn’t fit all, here’s a bit of generic advice.

There’s a good argument for taking a 2-year fixed rate today and reviewing in 18 months when SWAP rates may have eased off as economies recover from the pandemic. In addition, some lenders have very attractive base rate trackers which have lower pay rates than fixed rates, no early redemption penalties and (here’s the key bit) the option to move to a fixed rate at any time. Certainly something to consider if it suits you.

But the overwhelming advice remains. Talk to your adviser. On that note, we’ll bid you adiue. Until next time.