Mortgage Market Review
A Review of What's Happening in The Mortgage Market, by our Founder and Principal Director Tim Lynch
How High Will The Base Rate Go?
Last Thursday the Bank of England (BoE) increased its base rate by 0.75% to 3.00%. This was the biggest increase in 33 years, though it had been priced in for several weeks so did not come as a shock. Since the infamous mini-budget the media had been reporting that the base rate would rise to in excess of 6% in 2023, in truth the financial markets never indicated it would go as high as this suggesting a peak above 5%, however, BoE Governor Andrew Bailey in his press conference following last week’s meeting suggested that the financial markets were overestimating how high the base rate would go.Whilst the Governor did not put an actual figure on how high base rate would go, he did say that they would peak lower than expected and suggested to lenders that mortgage costs do not need to rise as much as they have done. The markets are now pricing in a maximum base rate in this cycle of around 4%-4.5% to be reached in Q3 2023, before starting to reduce in 2024 when it is anticipated that inflation will have reduced to normal levels. This 4%-4.5% range actually represents a return to the old normal, as highlighted within the graph below the average base rate over the last three hundred years is just over 4.50% hence the last 13 years of near zero rates and the previous 37 years of high rates which peaked at 19% in 1979 are both anomalies in the history of the BoE.
What's Happening With Fixed Rates?
Lenders were understandably quick to withdraw products following the mini budget as demand increased very quickly and their treasury departments were struggling to accurately price their rates given the volatility in the SONIA-Swaps markets that fixed rate mortgages are benchmarked to. Thankfully, the Swap rates have fallen by about 1.50% from their peak in September, but lenders have been slow to pass these reductions on and the current best buys are highlighted in the table.
Many high street lenders are quoting higher than the above even though the SWAP rates for all the four highlighted terms are now in the low 4% range, which in our normally highly competitive mortgage market would mean high street lenders would be offering fixes around 4.50% - 4.75%. It's my belief that lenders are currently happy to sit out the market as they have already reached their lending targets for this year, but that they will all re-enter the market with fixed rates starting with a ‘4’ later this year or very early in 2023.
| Purchases | Remortgage | |
|---|---|---|
| 2-Year | 5.35% | 5.43% |
| 3-Year | 5.49% | 5.63% |
| 5-Year | 5.26% | 5.26% |
| 10-Year | 5.14% | 5.14% |
Do You Take a Fixed or Tracker Rate?
When I first entered the industry in the early 2000s this was a regular conversation with clients as back then base rate was above 5% for most of the decade and there were frequent changes in the rate which resulted in a 50/50 split between clients taking fixed and tracker rates. Since base rate tanked following the financial crisis approximately 90% of new mortgages have been on fixed rates, and the only clients taking out trackers have been those that require no early repayment charges, but I think we are going to return towards a 50/50 split dependent on a borrower’s attitude to risk and perception of which way base rate is heading.
At this moment in time tracker rates are available at 0.60% above base rate and given it now looks likely that base rate will peak between 4%-4.5% these tracker products now look better value than the shorter term fixed rates that are currently on offer, particularly as most trackers are fully flexible with no early repayment charges and the option to switch and fix when you like.
Fixed Rate Risk Warning
All fixed rates carry early repayment charges so extra care should be taken particularly on longer terms
of 5 and 10 years as circumstances can change and borrowers need to be wary of the penalties for breaking the contract which are as a high as 7%. Many borrowers wrongly assume they are protected by having the option to port the mortgage to a new property, however, this is dependent on the lenders criteria and your own status at the time of the request.
How Can Jordan Lynch Help?
If your mortgage product expires in 2023 you should be reviewing your options early. Most lenders will allow existing borrowers to book in a retention product six months prior to your existing deal expiring. Extra care is needed as a number of lenders will not allow you to cancel this if rates subsequently reduce which looks likely so there could well be some buyer’s remorse. At Jordan Lynch, our advisers have expert knowledge of all lenders retention polices and we will compare rates to what is available in the wider market. Right now, we are encouraging borrowers to reserve a re-mortgage product with another lender whilst we monitor the retention rates on offer from your existing lender as they change frequently. There is no obligation to complete on a re- mortgage so if rates subsequently fall you can switch products without incurring a fee.