Amidst all the political ramifications post-General Election it seems rather wise to keep a careful eye on the country’s economic performance, particularly in terms of its potential impact on the mortgage market.
For what it’s worth, I see both potential positives and negatives to the Election result, in that a minority Conservative government (backed by the DUP) looks like it will need to negotiate a much softer Brexit than it previously planned, which I see as good for the UK economy in the long-term. However, on the minus side, a government with a majority might well have given the housing/mortgage market more confidence and we could have seen some improved growth throughout 2017 and beyond. Now, it seems likely that any growth will be slower than we might previously have come to expect.
Whilst we now have the negotiations for Brexit under way, it was interesting to see the Chancellor, Phillip Hammond, visible across the media last weekend talking specifically about how he was effectively sidelined in the election, and that the Conservatives should have talked much more about the UK’s economic positives during the campaign. One can’t help think that Hammond was put ‘in his cupboard’ by Theresa May during the election because she had no plans to keep him on as Chancellor, although the electoral cards have fallen rather different to how she might have expected, and Hammond has now not received his marching orders.
But the point is now whether Hammond is right with regards to the UK economy. Certainly, unemployment is still at relatively low levels but other measures might not be as strong as wished – GDP dropped to 0.2% in Quarter 1, while inflation has just come in at 2.9%. And, in our industry, we’ll all be acutely aware of what the MPC might do to interest rates if inflation continues to move upwards.
Another interesting point, specifically for the mortgage market, were the rumours over the same weekend that the Bank of England may also be looking to terminate the Term Funding Scheme. By the time you read this, it may already be curtains for the TFS, which was introduced at the same time in August last year when the MPC cut Bank Base Rate (BBR) to 0.25%. It was designed to help lenders to lend more in the residential space, and to help them pass on low interest rates, and judging by the competitiveness of the prime residential mortgage market since then, it has certainly done its job.
Lenders would be penalised for drawing down the TFS funds and not using them for loans, and therefore it’s been imperative that they lend, with many using pricing in order to tempt in borrowers, especially those seeking a remortgage. Should the Financial Policy Committee decide to end the TFS then the mortgage market, advisers and their clients are likely to see a noticeable knock-on impact, especially if (as many believe) this is also paving the way for an increase to BBR.
It’s been widely known that the Governor, Mark Carney, and members of the MPC have been willing to let inflation run above the 2% target level without raising rates, for fear that the economy would suffer a (quite frankly) unnecessary hit. However, the latest minutes from the last MPC meeting showed that support for such a strategy appears to be on the wane, with three members voting to raise rates by 25 basis points due in large part to the inflationary pressures. It would only need one more member to join them before we could see a split vote, and a decision taken by the Governor about which way to go. Again, there is speculation that a rise could come as soon as August when the MPC meets again.
So, there is plenty for advisers and their clients to consider here. The signal for a change to BBR has been given, even if it’s only back up to 0.5%, but add in the end of the TFS and those ultra-competitive rates still available – particularly for those remortgage borrowers with significant equity – might not be ‘on the shelves’ for too much longer. Access to that cheap funding source might see lenders deciding that they need greater return on their lending, and we might finally be back on the road to the ‘new normal’ interest rate environment we have heard about for quite some time.
In that sense, this could be the last chance summer saloon for your remortgage clients, in order to get them the rock-bottom deals still currently out there. We appear to be on the starting grid for interest rate rises; the important thing now might be to move your clients before those lights turn green.
Richard Adams is managing director of Stonebridge Group