With all eyes on the ongoing political situation, there are likely to be some key scenarios played out over the coming months, not least how Brexit might impact on the Bank of England’s Monetary Policy Committee’s (MPC) decisions around Bank Base Rate (BBR).
During August, the Committee unanimously agreed to keep BBR at its current 0.75% level, and in the preceding months there has been a tendency from Committee members to suggest that it will be gently increased over a period of time post-Brexit. The big questions of course, are around when Brexit will happen, will there be a deal, and what happens to the UK economy if ‘no deal’ is the final outcome.
As has been pointed out by a number of commentators, the Bank’s theme of ‘rates will increase’ at some point seems to be predicated on the UK leaving the EU with a deal. The markets however – and indeed the political mood music at present – seem to be far more focused on leaving without a deal and this is clearly feeding into a rather different scenario for the economy and therefore the decisions that the MPC will have to make.
It seems perfectly possible now, that if the ‘no deal’ situation does play out, that rate cuts, rather than rises, will be a likely outcome. Indeed, we’ve seen average two-year Swap rates falling in recent weeks which tend to predict a BBR cut at some point in the future, and this fall is also now starting to play out in the UK mortgage market, where we’ve seen a growing number of the major, high-street operators reducing mortgage rates.
The likelihood of others following suit in order to remain competitive is also high, although given the significant borrower appetite for fixed rather than variable mortgages, the ability to secure huge savings is perhaps not as great as we might envisage. Indeed, this might well sway some borrowers to look at their variable options, if they believe rates are going to fall.
If that shows as an increase in demand, then we may well see more lenders opting to invent and promote greater numbers of variable rate products, but – given the political uncertainty – we can all expect fixed-rates to be dominant for some time to come. At least, until we’re all certain of what might happen on the 31stOctober.
Interestingly, we’re not currently at the same point as they are in Denmark, where a bank launched the first negative interest rate mortgage earlier this month. Pricing a 10-year deal at -0.5% it effectively means that each month the mortgage outstanding will reduce by more than the borrower has paid.
It’s possible because the bank, Jyske, is able to secure funding at negative rates on the money markets and pass this onto the borrower. Currently, the main interest rate in Denmark – equivalent to our BBR – is -0.4%.
The UK lending environment is unlikely to follow suit, but we shouldn’t discount the possibility of further cuts to BBR which might well change the advice to certain clients who are willing to look at variable rate options.
Many of your clients might be sufficiently risk-averse to insist upon fixed-rate mortgages in the months ahead, but there could be an opportunity for them to make greater savings through a variable product. It’s another example of the benefit of professional, impartial advice as opposed to wandering back into a bank or simply rolling over when retention of business tactics is deployed by the lender.
Rob Clifford is a chief executive of Stonebridge Group