In the mortgage market of late, big numbers tend to get big headlines, so it was no surprise to see plenty of coverage after Moneyfacts released its latest average mortgage product interest rate figures.
The big news here, as you will have no doubt seen, was the average five-year fixed rate moving above 6%, for the first time since November last year, while the average two-year fix has been tracking above this level for the past few weeks.
There is a lot of nuance missed in such figures but with Bank Base Rate (BBR) having been raised to 5% last month, with swap rates continuing to track upwards, you can understand why the narrative feels somewhat set in stone at the moment.
And that narrative is the continued increase of mortgage rates, and what this means to existing and new borrowers, but perhaps of sharper focus, is what it means to those who are due to remortgage in this environment.
That said, as mortgage professionals we have to paint a more balanced picture than one which merely says, ‘Your next five-year fix will cost you above 6%’, because that’s not going to be true for large swathes of the mortgage population who come to market with bigger levels of equity/deposit.
So, of course, advisers are right to point out that these average rates cover the entire span of available fixed-rate products including those from mainstream to specialist lenders, etc, but if you also look at the current availability of high LTV mortgages to those that need them, we are not a million miles away from those average price points.
Earlier this month, I looked at some of the ‘best buy’ 95% LTV rates available to first-time buyers, and while there are some outlier products – notably those only available in certain regions of the country such as Wales, Scotland and Northern Ireland – the ‘mainstream’ options tend to be pretty similar.
And while you can still pick up a lifetime discount product below 5% – Vernon Building Society’s 4.9% offering – when it comes to five-year fixes, rates tend to start above 5.4%, and two-year alternatives are above 5.6%.
I should certainly point out that the Monmouthshire Building Society does have a 4.9% two-year fix and a 5% five-year fix, but it is only available in Wales and is very much an outlier offering – at least at the time of writing.
And, the big question of course, within this high LTV space is what rates might do next, and what lenders might feel their options are, particularly as we have also seen a pretty significant drop in 95% LTV product options over the last couple of months.
It all, unfortunately, feels eerily reminiscent of that post-‘Mini Budget’ period but without the opportunity to take immediate action which could dampen some of the damage done back then.
For example, the new Chancellor immediately called off some of the huge, uncosted tax cuts and spending giveaways announced, which eased concern in the money markets that the UK was on its way to something akin to bankruptcy. From that point on, a degree of stability and confidence was restored, and slowly over the months that followed, we began to move back to a mortgage market which resembled pre-September before Truss and Kwarteng got their hands on the tiller.
Now however the markets are ‘spooked’ by a more endemic issue – high inflation, with what seems like a lack of confidence in the Bank of England to bring it down quickly enough, and therefore the anticipation of even bigger rate rises and, dare I say it, the engineering of a recession.
You might well argue the ‘Mini Budget’ disaster precipitated a big jump in rates, but that over time they could be reversed. Would you be able to confidently argue that rates will fall through the rest of 2023 and into 2024, judging on how sticky inflation appears to be, and the limited levers available to do anything about it? I’m certainly not sure.
Which leaves us in a situation where the high-water mark of product rates might still be some way off. Many economists anticipate a 6% Bank Base Rate by the end of 2023, and swap rates appear to be holding their upward trajectory, meaning product rates – and certainly average ones – look destined to go higher.
It makes for a less than optimistic short-term for our market, and one in which borrowers are going to be increasingly worried about their monthly mortgage costs, particularly if they are having to jump product ships.
I think we all await the next inflation numbers with interest, followed by the MPC’s August meeting – the tanker is taking a long time to turn and there’s no suggestion it’s doing so quickly enough. Its current course may mean rough seas for many for some time to come.
Patrick Bamford is head of international business development at Qualis Credit Risk, part of AmTrust International