by Jeremy Duncombe, MD of Accord Mortgages
Context and perspective are the two words I’ve been using a lot recently. At any snapshot in time, there will be a statistic that allows you to create a positive or negative narrative around the same fact.
A 3.5% drop in house prices can be positioned as a crash if taken in isolation, but against the context of a 20% increase over two years can also be reported as a 16.5% increase. That’s why you can see the current market volatility as either a crisis or an opportunity.
That has never been truer than in the last few weeks, with the cascade of developments we’ve seen within the mortgage market. Firstly, increasing Swap rates due to better than expected economic news, then the Bank of England raising its base interest rate by 0.5%, double what many were predicting, and then the announcement of a Mortgage Charter to be supported by almost all lenders including YBS & Accord.
The base rate decision was triggered principally by June’s Office for National Statistics (ONS) figures, which showed inflation had stubbornly refused to budge below May’s 8.7% - well above the Government’s 2% target, and it’s stated aim to halve the current figure by the year-end. Of course, we all know, first-hand, why this is happening – the high cost of living, evident in everything from food and basic household supplies to energy and fuel, is causing us all considerable pain, and the Government believes the base rate is a key lever for countering this.
In reality, mortgage rate increases affect a very small cohort of people immediately, due to the majority being on fixed-rate mortgages. But borrowers coming off the historically low fixed rates they’ve enjoyed for years now are seeing their monthly mortgage payments rise by typically hundreds of pounds, compounding the impact of the other increased costs they are already juggling. Indications are that many are making tough decisions, living more frugally in a bid to prioritise their mortgage payments. That’s why we’ve been pleased to sign up to the new Mortgage Charter, signalling our commitment to offer borrowers all the support we can during these difficult times.
Higher rates and monthly mortgage payments are making it harder for those looking to buy a house to qualify for their loan, due to the impact on affordability which, as we saw after the mini budget, will prompt some to sit tight amidst such market uncertainty, slowing the market, reducing the supply of homes available and, in turn, putting pressure on house prices.
As the saying goes though, there are two sides to every coin and, while no doubt keeping brokers pretty busy, the current period of economic volatility also marks a unique opportunity for you to demonstrate your worth.
Given the complexity of today’s market, borrowers have never needed your expert guidance as much as they do now.
Common questions like ‘how much can I borrow?, ‘should I choose a fixed or variable rate?’ and ‘what term length should I choose?’ have been superseded by queries like ‘what is the long-term direction of interest rates?’, ‘is now the right time to buy?’, ‘what is the maximum mortgage term I can have?’ and ‘is this another credit crunch?’. And, while offering borrowers the kinds of precision answers they might want would require the kind of crystal ball-gazing none of us can offer, beefing up your personal knowledge around the market dynamics impacting mortgage rates and criteria will help you provide borrowers with more clarity. There’s another famous saying that ‘knowledge is power’, at least understanding what’s going on helps borrowers make the right choices for their circumstances at present.
Sitting and waiting for any future interest rate falls that might or might not happen, or effectively betting on future trends in the economy, is a dangerous game. Borrowers need to decide what’s best for them based on their current earnings, outgoings and budget. In addition, they need to consider the tangible level of interest rates, what lenders are currently able to offer and what their pockets will realistically stretch to month-on-month, with your help.
But how on earth do you fulfil this white knight role when you’re no doubt feeling you have new and confusing developments coming at you from all sides, not least keeping up-to-speed with the latest moves lenders are having to make on product pricing and criteria, to reflect market conditions?
Well, taking every possible opportunity to increase your own understanding - not just of the ‘outputs’ of market developments, but the underlying factors causing them to happen, will enable you to provide the truly expert advice borrowers desperately need right now, and so stand out from your competitors – not to mention building long-term loyalty among the clients you support in finding a positive path through the volatility.
And we’re here to help!
Below you’ll find a summary of our latest take on the economic factors influencing the mortgage market – to give you ammunition for the kinds of conversations you’ll need to have; but also, hopefully, some much-needed reassurance, because things are far from all bad. We are hopeful that the current volatility in the market is effectively the equivalent of intermittent aeroplane turbulence along the route to medium-term recovery and stability, as opposed to the smooth glide path some were expecting.
Keeping our heads amidst hyperbole and panic is part of our responsibility to borrowers, and recent developments like a 3.5% drop in house prices need to be seen in the context of the 20% increase over the past two years. It’s also important to remember that, historically, interest rates have averaged around 5%. Although their impact is currently exacerbated by higher house prices than in previous higher-rate environments, what we’re seeing represents the return to more normal levels, which was always inevitable.
So, here are our key ‘need to knows’ about present market dynamics, to help you explain things to your clients:
The acceleration in private sector pay growth will be one of the things keeping the Bank’s Monetary Policy Committee (MPC) members awake at night, because higher wage costs allow firms to pass on higher prices for consumers, making this a key contributor to higher inflation, which is why financial markets now believe more interest rate hikes are needed to cool consumer demand, and, in turn, ease price pressures. If mortgage rates surge as expected, however, this would almost certainly tip the economy into a recession and potentially spark a housing downturn. Interest rate fluctuations typically take up to two years to impact the economy.
Since last June, the Bank of England base rate has increased from 1% to 5%, an overall increase of 4%, so we expect the full impact of this to hit households and firms later this year. However, because more people than before – around 80% – are now on fixed-rate mortgages, the impact of these rises in interest rates is likely to take longer to feed through into the economy than with previous such measures, delaying the impact on mortgage holders. UK Finance, the trade body for UK retail lenders, suggests 1.81 million people will be refinancing their home loans at some point this year onto considerably higher rates, which will likely squeeze household take-home pay even further, start to dampen demand and bring inflation down.
by Jeremy Duncombe
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by Jeremy Duncombe
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by Jeremy Duncombe
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