Mortgage Market Review
A Review of What's Happening to Mortgage Interest Rates, by our Founder and Principal Director Tim Lynch
How Are Mortgage Rates Priced?
Mainstream lenders typically benchmark their mortgage rates against the Bank of England Base Rate (BOEBR) if they are ‘tracker’ rates or the SONIA Swap rate (Sterling Overnight Index Average) if they are ‘fixed’ rates. Building Societies also offer ‘discounted variable’ rate products where the rate is a discount from the Society Standard Variable Rate (SVR), which is not explicitly linked to the BOEBR as the SVR is set by the Society Board of Directors. Equity Release rates which are fixed for life are benchmarked to the UK 15 Year GILT.
Why Are Mortgage Rates Increasing?
If you are on a base rate tracker your rate will have increased by 1.15% in the last eight months as the BOEBR which is set by the Monetary Policy Committee (MPC) has moved from 0.10% to 1.25%. Tracker rates are a set margin over the BOEBR so if you are paying 1.25% above BOEBR your rate has increased from 1.35% to 2.50%. The MPC has increased the BOEBR to try and counter inflation which as is well documented is currently way above its desired level of 2.0%. SONIA Swaps and GILTS have also increased because of the expectation of future interest rate rises. Clearly if you are on a Fixed rate, you will have seen no change to your rate, however, borrowers whose fixed rates are expiring this year are seeing a big increase from what they have been paying to what they are now being offered. Lenders tend to offer fixed rate products for 2, 3, 5 or 10 years.
| Current Rate | 1 Year Ago | |
|---|---|---|
| 2 Year | 2.80% | 0.15% |
| 3 Year | 2.80% | 0.24% |
| 5 Year | 2.70% | 0.45% |
| 10 Year | 2.54% | 0.73% |
To make a profit from fixed rate mortgage lending lenders need to charge a margin above the SONIA swap rate. As highlighted in the table above the rates have increased dramatically in the last year, hence mortgage lenders have increased their fixed rates accordingly. Most Building Societies standard variable rates have also increased, however, not necessarily in line with the base rate and we have typically seen them increase them by around 0.5% rather than 1.15%. More on this below in where are the best value deals currently. For Equity Release the 15 Year UK GILT yield has increased from 1.10% 12 months ago to 2.60% today. The lowest priced fixed rate for life is now around 3.80%, whereas it was 2.3% twelve months ago so you can see a clear link here as both have increased by around 1.50%.
How Much Will Rates Increase To?
The crystal ball is needed to answer this and a lot of economists in the media are predicting the BOEBR could rise to 3.5% by the end of 2023 and eventually go back to where it was prior to the financial crisis c. 5.50%. In my opinion this is scaremongering and the financial markets such as the SWAP and GILT rates do not suggest this. My best guess is that it will steadily increase to a range of 2.50% - 3.00% as the minutes from the MPC meeting last month suggest that they expect inflation to fall back to normal levels next year, plus they have concerns about a potential UK / global recession which would ordinarily be a reason to cut the BOEBR or at least negate the need for further increases as people tighten their belts in recessions and the reduced spending can help bring down the rate of inflation.
Where Are The Best Value Deals Currently?
Some mainstream lenders are currently offering 2 and 5 year fixed rates below the SONIA Swap which is clearly great value as they are technically not making any profit on these deals. One does need to be careful when fixing rates as such products still sadly have excessive early repayment charges, and although most mortgage offers have a clause that says you are able to ‘port’ this mortgage to a new property, should you move house this is dependent on the lender’s criteria at the time of the request, which many borrowers fall foul of. For those that are willing to take some risk the Discounted Variable Rates offered by the smaller building societies are very attractive at the moment as the SVR which they are discounted from have not moved up as much as the BOEBR. Many of these products are currently priced below 2.0% and if BOEBR does go up by another 1.50% that the financial markets currently imply it does not necessarily mean that these discounted variable rates will go up by that much.
How Can Jordan Lynch Help?
If you have a fixed rate that expires in the next six months you should be looking at booking in a re- mortgage product now as most lenders provide mortgage offers that last for six months. Your existing lender will generally offer you a retention rate 3 months prior to your existing deal expiring and if this turns out to be lower than the re-mortgage rate then you simply accept the retention product as you are not obliged to complete on the re-mortgage. Why not speak to one of our dedicated team on 0161 486 9316 to review your mortgage options. Referrals of family, friends and colleagues are gratefully received and is of course the reason we exist and continue to grow.