Since the Chancellor’s “mini” budget last week, the latest news has hardly stopped. Comments from the International Monetary Fund, and more specifically an intervention from the Bank of England this week, show that real risks are emerging for the mortgage market.
In such a volatile market, it is essential that information is communicated clearly and frequently between lenders, advisors and clients. While more changes may be on the way, it’s worth taking stock of the current situation as we approach the end of the month.
Over the past week swap rates have risen at a rate we were not prepared for. Rapid changes in such a short time significantly affect the market and pose a major challenge for lenders, with corresponding repercussions elsewhere
These increases have resulted in almost hourly price revisions and product withdrawals. While recent trends suggest that lenders could re-enter the market with revised rates or products a few days later, uncertainty is mounting. And some lenders may stay out of the market longer rather than coming back in only to have to withdraw the product again soon after.
The impact on the workload and stress of advisors and our clients should not be underestimated. Many advisors became desperate to lock in deals and offers before they were taken down. Systems were unable to keep up, which caused further stress and disappointment.
In general, product availability has increased steadily post-Covid. Hopefully the current hiatus will come to a halt and we will soon return to these more positive trends.
The impact on rates
Swap rate increases have been eye-catching. It’s only Monday this week that customers with an LTV of 60% could get rates of 3.39% for a five-year fixed product. On Wednesday night, the best available option on L&G’s sourcing engine was 3.75%.
The recent long period of relative rate stability will mean that these potential increases in mortgage payments will come as a shock to many who have calculated their spending at lower levels.
Rate increases this year have been dramatic compared to recent years, although it is important to note that the immediate impact was limited as the vast majority of mortgages are fixed. Of course, this won’t last forever, and the rate shock for those entering into transactions over the next few years could well be significant. Next year should be an exceptional year for product deadlines, amplifying this effect.
Looking at the data from L&G’s SmartrFit tool, first time buyers (FTB) are already facing significant issues. The most common profile of FTBs – let’s call them “Mr. and Mrs Average” – are a working couple, aged 32, in need of a loan of £187,000 with an income of £41,500.
With rates at 3.99%, their monthly income and expenses, an average drawn from all adviser inputs, are already at par. For every 1% rise in interest rates, they will face an additional £100 a month in interest payments. Even without the cost of living increasing elsewhere, this couple now faces expenses that exceed their monthly income.
To stay positive
There are, however, positive signs. Lenders are still seeing a reduction in levels of foreclosures and mortgage defaults, unemployment remains low and mortgage stress test rules are also expected to mean affordability has been tested at 7% or more .
In addition, £76bn of products are due in the fourth quarter of this year, and ongoing maturities will mean the market will grow in 2023. From an advisor’s perspective, consumers will again need help as they face potentially alarming rate shocks.
Predicting house price movements is always a tricky game. Before last Friday, the market sentiment was that house prices would remain stable next year. Now, the direction the market will take is less clear, with many factors to consider.
One is the stamp duty changes announced by the Chancellor, which should maintain or improve the buying momentum. Although this relief also applies to second homes and rentals, and with the end of the purchase assistance program, it is feared that the government measures will be limited.
Countering this will be the potential decline in mortgage affordability among customers affected by the rising cost of living, alongside declining product availability. Consumer sentiment should also be taken into account, which could be negatively affected by headlines.
Despite these emerging risks, the market has shown time and time again that it can withstand periods of volatility and bounce back from setbacks. Just over two years ago, all mortgage market activity was halted by a pandemic that no one saw coming, but the industry rose to the challenge and the market emerged from lockdown in a healthy state.
Ultimately, the success of the mortgage market depends on trust between lenders, advisors and clients. We all benefit when we can find a way to work together. Understanding, patience and clear communication will be essential to support the market through these latest challenges.
Kevin Roberts is Managing Director, Mortgage Services, Legal and General