The start of February has kicked off with something of an interest rate bang – albeit one completely anticipated by most in our market.
The MPC’s decision to raise Bank Base Rate (BBR) was widely expected, and seemingly nailed-on, with the only bone of contention being whether the Committee would go for a half-way house approach of 25 basis points (bps) or go the whole hog to 50bps.
As we know it went the full 50, raising BBR to 4% – the 10th consecutive increase in a row – although there were two members who voted to keep rates at 3.5%.
The big question is ‘What happens next?’ because as we know, this rise was baked in to a lot of mortgage pricing already; in fact, there is a degree of irony to the point that as BBR was increased to 4%, Virgin Money were on the brink of launch a 10-year fix up to 75% LTV priced at 3.99%.
And of course, there have been a number of discounts and trackers available at price points below this, although with the added ‘risk’ that comes with being pinned to BBR or the lender’s own SVR.
In Ghostbusters parlance, the streams appear to have crossed, and while rates (on average) are still above where they were pre-‘Mini Budget’, they have continued to track down, and one suspects this will continue particularly as lenders seek to secure the market share and business volumes they need to hit their targets.
Potential first-time buyers looking at the recent rate increase may feel it is another kick in the teeth, but as we know, it doesn’t necessarily mean product rates rise; in fact it could lead to quite the opposite.
As always, there is a lot for first-timers to consider, and a number of conflicting messages to get their heads round. So, for example, as house prices appear to be inching down – the latest Nationwide index shows the average price of £258,297 being 3.2% below its August 2022 high – which might mean they have to save a little less in the way of a deposit, the cost of living increases particularly for those living in rental accommodation, make this still a difficult obstacle to get over.
Solving that affordability conundrum for first-timers remains tricky, but it will be helped by the fact that rates have been dropping at all levels, including those for high LTV products.
There is further good news however for those seeking 95% LTV mortgages – a mainstay for first-time buyers – and it comes in the form of a continued increase in product numbers and also that further shift in product pricing.
Each month – using the Nationwide average house price which this month would mean a 5% deposit equalled £12,915 – I look at 95% LTV product availability. As we know, this took a big hit due to the carnage inflicted by the ‘Mini Budget’, and while we are still not at the numbers we had pre-that particular disaster, we continue to move in the right direction.
95% LTV product numbers are up to 135 from 126 in January, with the bulk of those being fixed-rates (114) and 21 trackers/discounts/variables.
And fixed-rate pricing is beginning to shrink the gap between its tracker, etc, counterparts – not surprising given these latter products will now include the BBR 0.5% increase.
Hence, whereas last month the cheapest discount/tracker was priced at 3.29%, now it is 4.04% for a two-year Scotland-only deal and 4.15% for a lifetime discount.
Fixes however have finally gone below the 5% mark. Newcastle Building Society hassomething of an outlier product leading the way – a 4.19% two-year fix – while Monmouthshire have a 4.9% over the same term, and Yorkshire Building Society have a five-year fix at 4.93%.
My expectation is for more lenders to now follow this interest rate path, specifically in terms of pricing 95% LTV fixes more competitively, although it still seems likely that the ‘better’ rates will be for five-year terms, we can see some movement in the two-year fixed-rate bracket, no doubt helped by swap rates having continued to fall for two-year money.
Overall, it’s important to educate would-be borrowers that what is happening with the Base Rate doesn’t necessarily translate into product pricing; the market believes that BBR will peak at 4.5% but the Bank of England seemed to be suggesting this monthit may not get to that point.
If inflation does fall sharply in the months ahead, the need for further action is tempered, and coupled with a lender community who are going to need to price increasingly aggressively in order to secure the business available, we might be looking at a future high LTV market/pricing market which looks more like the summer of last year than at any point since.
Patrick Bamford is head of international business development at QualisCredit Risk, part of AmTrust International