A word on the mortgage market October 2022

Hello and welcome to the latest edition of A Word on the Mortgage Market. We'll be honest, we wish we were writing to you in happier times, but there's little denying the fact that it's tough out there.

You'll no doubt be aware that the Bank of England's Monetary Policy Committee (MPC) continues to increase Bank Rate and that mortgages have been an ever-present topic in the news over the last few weeks. So, we thought it sensible to take a brief look at this and exactly what it means for borrowers. So we'll jump right in.

Stop the press

A very brief mention of some good news amongst the doom and gloom. Just last Thursday, the Deputy Governor of the Bank of England went on record to say he thinks predictions of Bank Rates rising to 5.5% by next summer are too high. His expecton is that the peak will be closer to 4%. Which, in these challenging times is cause for (mild) celebration.

In addition, industry experts at Connells Estate Agents are still reporting that every property they have registed with them is being chased by an average of nine people. So, a property market collapse seems unlikely.

Bank Rate hits 2.25% - is there any light ahead?

For the seventh time in a row, the Bank of England raised interest rates last month, The rate now stands at 2.25%, its highest level since the height of the financial crisis of 2008. No-one, save a few traders, wants to think about 2008 and that's probably going to be the same for this year when we enter 2023 and eventually get out of this mess.

The Bank is trying to curb inflation, which currently sits a worrying five times higher, at 10.1% for September, than its target rate of 2%. Not great, to say the very least. The Bank now expects inflation to peak in October at 11%, which is slightly less than its previous forecast of 13%. Ordinarily, an expectation that inflation will not rise as high as previously predicted would be cause for celebration. But these are anything but ordinary times.

A glance at the MPC’s minutes shows that the decision to raise rates by 0.5% was far from unanimous. Of the nine members of the committee, five went for the 0.5% rise, three wanted a more hawkish rise of 0.75% and one lone dove thought that 0.25% would be enough. For now. What this means is hard to really pinpoint, but it does indicate that even those tasked with plotting our journey throw this aren’t really sure what the best course of action is.

What's changed since we spoke last?

When we wrote to you in July, we provided a bunch of financial numbers to try and add some context to the overall market, and it’s worth briefly looking at one of those that has such a key influence on mortgages.

Over the last few weeks we have witnessed an incredibly rapid rises in gilt yields. Now, you may well ask us why we are telling you this. A fair question. Well, gilts fuel the pricing for swap rates, which in turn fuel the rates for fixed rate mortgages. Swap rates (the rates at which banks lend to each other and a key determiner of fixed rate pricing) have, you’ve guessed it, gone up.

In July 2-year swaps were at 2.69% and 5-year swaps at 2.5%. Today, they sit at 4.86% and 4.66% respectively, and they are moving all the time. But, for now, the trend appears to be stable or even slightly downward. Combine this with lenders pulling and replacing products more often than the wind changes (one leading high street lender did this three times last week) and it’s difficult to know what to do. But we will try and provide some guidance.

What should borrowers do now?

As the summer began, the choice of what type of product to take wasn’t really much of a choice. Fixed rates offered great value in most timeframes. Yet, for some, that may well not be the case anymore.

We believe that the time has come to at least consider not only trackers, but also discounted mortgages – discounts tend to be the domain of the medium to small Building Societies, who may see this as an opportunity. As we write this, borrowers can obtain discounts from lender’s Standard Variable Rates (SVR) with initial pay rates in the mid 2% range. Clearly, the discounts will go up as Bank Rate does (although of course lenders don’t have to follow these rises), but logically, if say Bank Rate goes to 4% (up another 1.75%) then you’re looking at pay rates on these discount products of around 4.5%. And, right now, both 2-year and 5-year fixed rates are already above 5%.

We could spend significant words and take up more of your valuable time going into lots of detail on this, but that would all be a bit generic. And that won’t do right now.

The key messages

What is clear, as we said just a few words ago, is that generic advice simply will not do. It’s absolutely crucial that you keep in touch with your adviser and discuss your own unique situation. There are so many variables in deciding what’s best for you, such that only detailed advice will do.

If you need extra funds and you’re currently sitting relatively pretty on a decent rate, then you should consider other ways to raise these funds. Whilst they may not sound particularly appealing, second charge loans are a good way to get more money without having to move your main mortgage and it may well mean that you are financially better off when it comes to your total monthly payment outlay.

And finally, please remember that we are here for you. If you’d like to discuss anything at all then please just get in contact with your adviser who will be only too happy to help.