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Mortgage Market Review

Summer review of base rates, mortgage rates and the current housing market

Introduction

In our last market update in January, we were still coming to terms with the chaos that ensued in the autumn of 2022, and the shock of much higher interest rates following 14 years of a sub 1% base rate. It was predicted that house purchase transaction volumes for 2023 would collapse by over 300,000 to just 870,000 and that house prices would crash. Fast forward four months and the market is returning to a new normal – or should that be ‘old normal’? Mortgage rates have reduced further from the unnecessarily high levels seen in Q4 2022. Buyers have now come to terms with the higher rates, and motivated sellers have accepted that prices are softer than they were during last years end of cycle boom. All taken together, it now looks like house purchase transactions will exceed 1.0m this year, which is similar to 2019 levels (pre pandemic).
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Inflation and the Bank of England Base Rate

The base rate has now reached the 4.50% that markets suggested would be the peak back in January. However, this was based on Bank of England, HM Treasury and OBR forecasts that the UK economy was in recession and would remain so for each quarter of 2023. They couldn’t have been more wrong on the economy as it hasn’t entered a recession and has continued to grow - albeit modestly, and we just have to wait for next week’s inflation data to see if another increase in base rate is needed. Inflation is the main reason that all central banks around the world have had to increase their base rates. They do this to encourage individuals to save, hence creating lower demand for goods and services which in turn should keep a lid on prices and bring inflation down.

Additionally, a recessionary environment has the same effect as there are normally vast numbers of job losses, meaning individuals tighten their belts in terms of spending. Everyone will obviously be pleased to hear that the UK economy has held up well and avoided a recession, but the biproduct of this is stubbornly high inflation and higher interest rates. Markets today predict there will be a further increase in base rate to 4.75% this summer, but if next week’s inflation data is helpful, all bets are off. Equally, if inflation remains above 10% then we could see a base rate of 5%, however, fuel and energy prices have fallen a lot recently so it’s hard to see inflation remaining at the current elevated levels for much longer and a fall to < 5% by the end of the year would keep a lid on further base rate rises.

Fixed mortgage rates now priced favourably

As previously covered, the fixed mortgage rates charged by most lenders were unjustifiably high in Q4 2022 being way above what the financial markets suggested they should be. The SONIA (Sterling Overnight Index Average) swap rates widely used by lenders to hedge fixed rate mortgage risk have actually increased this calendar year due to the high inflation rate, which suggests higher base rate for longer, but contrary to this, lenders fixed rates are considerably lower as evidenced in the table. As illustrated, in November, the best buy 2-and 5- year fixed rates were both above 5% and our prediction was that they would reduce to below 5% by Christmas and continue to fall into the spring, which has proved to be the case. Despite a clear increase in funding costs since January of around 0.30%, the best-buy fixed rates have all reduced further and are now deemed to be very generous. Lenders are now competing heavily for business, primarily because lending volumes collapsed and they have excess liquidity, and the macro environment (no recession) is much more positive.

Top Tip - Borrowers booking in mortgage products up to six months in advance of a rate expiry, should ensure that the lender allows you to book a new product at a lower rate if one becomes available prior to completion. This is not routinely available across all lenders.

SONIA Swap Rates
November 2022January 2023Today
2-Year4.30%4.10%4.39%
3-Year4.12%3.87%4.16%
5-Year3.85%3.62%3.89%
Best Buy Fixed Rates at 75% LTV
November 2022January 2023Today
2-Year5.50%4.70%4.27%
3-Year5.49%4.60%4.35%
5-Year5.26%4.39%4.03%
Holiday Let Wales

Will house prices fall further?

House prices have fallen from their peak last year but there are variations in how far they’ve fallen depending on area and property type. Properties that have been modernised to a good specification and are located on a nice plot in the right area have suffered modest falls of perhaps 5%. Properties in need of modernisation, out of preferred school catchment areas, or with noise disturbance and/ or unattractive plot have perhaps fallen by 10% or more. Buyers no longer seem to be attracted to doer-uppers perhaps due to the high costs of materials and labour and the time involved, hence buyers can negotiate more on these properties. If the doom and gloom about a big recession had proved to be correct house prices would have fallen much further, but as this has not proved to be the case, we’ve not seen the forced sales that were evident in previous downturns. The labour market remains strong, the government have provided cost-of-living support via energy subsidies and the population continues to increase by over 500,000 a year which new house building does not support, so demand for housing remains high and puts a lid on house prices falls.

Should I wait for interest rates to reduce before buying?

This is a common question but as house prices are partly determined by the price of mortgages it’s pointless putting off a move in the hope that rates fall, as if they do, more buyers will be in circulation so you’ll have to pay more for the property due to increased demand. If you believe there’s going to be a big recession, major job losses and further increases in interest rates then it would be worth delaying as all three taken together would bring prices down further, but with the Bank of England last week announcing their biggest ever upward revision to UK economic growth, this does not look likely in the near term.

Do I 'track' or 'fix'?

Late last year ‘trackers’ were the obvious choice as lenders fixed rates were priced too high, but with fixed rates now priced favourably it is a 50/50 call. Best buy fixed rates are now available between 4%-4.5% and trackers start from 4.64% so are higher, but the expectation is still there that once inflation is brough under control in 2024 that the Bank of England will then start to reduce rates. Trackers offer great flexibility as most don’t come with early repayment charges and offer the options to switch and fix. Fixed rates offer certainty but come with early repayment charges that are higher the longer you fix for, so if rates do fall it is difficult to get out of them. The decision is always with the borrower and is generally determined by their attitude to risk and level of disposable income.

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How long should I fix for?

Currently the longer you fix for the lower the rate you will get which runs contrary to what people are used to and borrowers should ask themselves how is this possible? The answer is because there is an expectation that the Bank of England will start to cut their base rate in the second half of 2024 onwards, therefore, it makes economic sense for lenders to offer lower rates on longer term fixes. With cost-of-living pressures it is understandable that lots of borrowers will take the lower rate on offer on a 5 or even 10 year fixed rate, but borrowers just need to be aware that such products carry hefty early repayment charges so if lower rates are available in 2 years there will be a big penalty to pay to switch, which is often as much as 5% of the loan amount.

A further warning for those that may move home within 5 years is that whilst all 5 year fixed rates offer the option to ‘port’ their product to a new property, this is only an option and is subject to the lenders ever changing criteria at the time of the request. Sadly, many borrowers get caught out by this and banks will never waive the penalty charge as they form a core part of their mortgage pricing model i.e. there is an expectation that a set percentage of borrowers will pay it.

Current Best Buy Rates - Residential at 60% LTV
2-Year Fix4.27% + £999 fee
3-Year Fix4.29% + £999 fee
5-Year Fix3.98% + £1495 fee
2-Year Tracker4.64% - Margin 0.14%
Current Best Buy Rates - Residential at 75% LTV
2-Year Fix4.27% + £999 fee
3-Year Fix4.35% + £999 fee
5-Year Fix4.03% + £999 fee
2-Year Tracker4.83% - Margin 0.33%
Current Best Buy Rates - Residential at 90% LTV
2-Year Fix4.73% + £999 fee
3-Year Fix4.69% + £999 fee
5-Year Fix4.42% + £1495 fee
2-Year Tracker4.49% - Margin 0.99%
Current Best Buy Rates - Residential at 95% LTV
2-Year Fix5.30% + no fees
3-Year Fix5.24% + no fees
5-Year Fix5.24% + no fees
2-Year TrackerNot available
Buy-To-Let - Personally owned 75% LTV
2-Year Fix4.03% + 1% fee
3-Year Fix4.96% + £999 fee
5-Year Fix4.47% + £1495 fee
2-Year Tracker5.29% - plus 1% fee
Buy-To-Let - Limited Company 75% LTV
2-Year Fix4.99% + 2% fee
3-Year FixNot available
5-Year Fix4.99% + 2% fee
2-Year Tracker4.99% - plus 2.50% fee

How Can Jordan Lynch Help?

If you are purchasing a new property, the process can take several months and if we arrange your mortgage, we'll constantly review your product right up to completion to ensure that you obtain the lowest rate possible by the time you collect the keys. If you’re a homeowner and your mortgage product expires this year we will book the best available remortgage or retention product for you six months in advance but will ensure that this is a product that can be cancelled, so if more favourable products are launched in the interim period (likely to be the case) we'll switch you to one of those prior to completion. Call us on 0161 486 9316 or email enquiries@jordanlynch.com to learn more.