My optimistic view of why it makes sense to defer refinancing is that house prices will settle down a bit, but not significantly. This is based on the Bank of England interest rate which is currently 3% and will not go above 4%. While interest rates will continue to rise, there are signs of caution coming from members of the Monetary Policy Committee. BOE chief economist Huw Pill said at a web event last week that he expects inflation to fall rapidly in the second half of 2023; In this environment, it is unlikely that the MPC will continue to advocate higher interest rates.
The current development of mortgage interest rates is strongly reminiscent of the beginnings of the pandemic. In 2020, the supply of mortgages fell sharply as all the most attractive deals were withdrawn en masse. As the economy stabilized, lenders returned to the market with increasingly competitive products. This pattern repeats itself. After September’s ill-fated mini-budget, 1,500 of the best deals were pulled, contributing to a sharp rise in average interest rates as lenders tried to shut down new business. But just like 2020, realistically priced offers keep coming as uncertainty recedes and lenders regain their appetites.
The sharp rise in mortgage rates after the mini-budget was more obvious than actual. According to Peter Tsouroulla, head of mortgages at Trinity Lifetime Partners, very few deals have been completed at the staggeringly high interest rates of 6-7% that are widely talked about in the media. The average rate of mortgage completions in October was actually 3.1%.
Although the economic environment is deteriorating, the UK mortgage market is generally in decent shape. Banks weathered the pandemic well and are still keen to lend safe assets at rates that are now significantly higher. The Principality Building Society’s current most competitive five-year fixed rate is 4.6%. That’s a sizeable drop from the last best offers comparison on Oct. 20, which came from Nationwide at 5.39%, despite the fact that the BOE had hiked interest rates by three quarters of a point in the meantime. It helps that the job market is the strongest in 40 years and overall wages are up 6%.
British financial markets have calmed down significantly since Chancellor Jeremy Hunt’s autumn statement on November 17th. This is an important requirement for lenders whose mortgage offers are valid for up to six months to bridge the often lengthy process of completing the home purchase. Gilt yields and the two- and five-year interest rate swap rates that many lenders reference when pricing their mortgages have fallen back to levels last seen in fixed income in early September, before the leverage crisis erupted. With 10-year swap rates now lower than five-year rates, lenders are beginning to offer more competitive fixed-rate deals with maturities up to a decade, particularly for more established borrowers.
Almost all new mortgages in recent years have had fixed-rate initial terms, with such deals now accounting for 85% of all home loans, according to Nationwide. Some 1.8 million will need to be rolled over in 2023, about a quarter of the total outstanding, and the vast majority will need to be re-written at much higher borrowing costs. Refinancing can be arranged three months in advance, often up to six months when switching lenders, but this does not bind the borrower, only the lender. Better deals could easily arise before existing agreements expire, so patience can be rewarded.
Double-digit UK inflation, exacerbated by the energy crisis, is eroding affordability, but this may not last much longer. It helps that household savings have been built up significantly during the pandemic. There’s nothing to say house prices can’t go up in a recession, especially on a small, crowded island with ridiculous planning rules and a government incapable of improving them. Owning property in an inflationary environment usually works in your favour.
Mortgage applications have fallen sharply and will likely continue to fall as the housing market goes into hibernation mode earlier this year. Nevertheless, the actual approvals are holding up relatively well. Mortgage brokers are reporting that business is returning with a return to the firmer underlying trend ahead of the mini-budget saga. So while momentum has been limited by unexpected market volatility, there is reason to believe it will return in the spring. It’s encouraging that smaller lenders have been pushing forward with the best deals available over the past month. The larger banks, which have dominated for the last two years, are currently taking a back seat. The refinancing market alone will already occupy overstretched processing capacities.
Demand for tracker mortgages with variable rates tied to the BOE’s base rate plus a premium based on the borrower’s creditworthiness has increased recently as initial monthly payments are lower than fixed rate arrangements. These will rise along with official interest rates, but there is also the prospect that they could fall again in the coming years. And by the summer, when most refinances come due, there should be a lot more choice across all the different sizes, durations, and types of mortgages.
Since the Mortgage Market Review in April 2014, the way home finance is financed in the UK has changed significantly, with far more stringent requirements. This has resulted in a significant reduction in arrears and seizures. Borrowers are stress tested, with affordability being assessed at much higher potential interest rates. There is more focus on the loan-to-income ratio and not just as a percentage of property value. It is much harder to get seriously leveraged than before the global financial crisis, which has improved the quality of lenders’ overall exposure.
It’s too early to get overly bearish on the housing market, which has an uncanny and enduring ability to shrug off bad news. The fundamental reasons why UK property is expensive relative to average income have not gone away. For homeowners with expiring fixed-rate mortgages, it pays to wait as long as possible for more competitive offers as interest rates remain stable and lenders deploy their sizable cash reserves in what is still a safe and lucrative market.
More from the Bloomberg Opinion:
• Great Britain is playing politics with the rental market: Stuart Trow
• The UK housing market becomes desperate again: Merryn Somerset Webb
• Hunt’s tax medicine won’t ease Britain’s pain: Marcus Ashworth
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Previously, he was Chief Markets Strategist at Haitong Securities in London.
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