In this market, it can make complete sense to wait sometimes, especially when you’re about to write an article focused on interest rate levels and where they might be heading.
The obvious point to make here – in light of the MPC’s decision to increase Bank Base Rate (BBR) for the fourth consecutive time – is that rates are heading up, along with inflation which the Bank now estimates will peak at around the 10% mark before the end of 2022, and anticipated unemployment.
At the same time, UK GDP is anticipated to shrink and take us, if not into, recession, then pretty close to it. A much-used phrase is ‘perfect storm’ and the economy undoubtedly looks like it’s going to be buffeted pretty hard throughout the next year or so.
In a sense, you wonder whether the MPC’s decision to increase BBR is really the right one, right now. It might feel it has no choice but to try and dampen inflation, but these are far from normal times and a rate rise now just looks like it is adding further costs to borrowers at a time when they are dealing with rising prices across the board.
No one can quite explain to me how a series of BBR rises brings down inflation when the pressures causing it to rise appear to be outside the Bank’s sphere of influence anyway. Normal rules do not apply.
There are over two million mortgage borrowers in the UK currently sitting on either SVRs or tracker products, and – unless they are extremely fortunate – they will all see their monthly mortgage payments rise again, at a time when utility bills have more than doubled and will go up for most in October, and when that inflation rate is adding considerable cost to monthly expenditures.
Now, of course, not all lenders will move their SVRs by the full rise in Base Rate, but according to Moneyfacts, the average SVR is currently 4.71% so these borrowers are already paying significantly above BBR anyway plus they have no security against further rises.
Lest we forget that most are predicting BBR will comfortable hit 2% over the course of the next 18 months or so with Capital Economics predicting it will be 3% by the end of next year.
Of course, large numbers of borrowers are insulated against such rises by being on fixed-rate mortgages, but two million households are not, and after a decade where we had perhaps all got used to ultra-low rates, the direction of travel is clearly out of this trend and into a higher band.
It all adds up to the likelihood that, as fixed rates become more popular and are perhaps seen as ‘the only game in town’, we’re going to have lenders inching those rates up as well in order to recover margin, and to cope with (in many cases) the extra cost of funding.
Somewhat ironically, when it comes to first-time buyers and those seeking higher LTV products, over the last year or so, rates have actually been on a downward trajectory. That may now change.
We all know that the 60% LTV residential mortgage business has been ultra competitive, but rates have been rising here at both two and five-year levels, while further up the LTV scale – particularly 95% – rates have dipped since the market was resurrected by the government’s guarantee scheme launched last year.
Whether that trend will hold, in light of the increase in BBR, remains to be seen but I suspect lenders will still want to complete business here, particularly with first-timers at the start of their property journey, who they’ll believe they can hold onto for a much longer term, given they will undoubtedly want payment certainty for the foreseeable future.
Then again, who wouldn’t want payment certainty right now? Might we actually start to see the long-term, fixed-rate mortgage market hitting its straps within such an environment? It’s long been suggested that 10-year-plus fixed rates would grow in demand – one has to believe that if they can’t flourish in this current environment, when will they?
Overall, given the shifting nature of BBR and what it will mean for products, the need for advice is immense. Will an intermediary community, that has been notoriously averse to longer-term products for all manner of reasons, feel the need to recommend them over the course of the months ahead? Those who have either recently launched such propositions, or are about to, will certainly be hoping so.
Patrick Bamford is head of international business development at Qualis Credit Risk, part of AmTrust International