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My optimistic view, and why it makes sense to delay refinancing, is that home prices will come down a bit, but not significantly. It is predicated on the Bank of England interest rate, currently 3%, not rising above 4%. While official rates will rise further, there are signs of caution from members of the Monetary Policy Committee. BOE Chief Economist Hugh Peele said at a web event last week that he expects inflation to decline sharply in the second half of 2023; It is unlikely that the MPC will advocate higher rates still in that environment.
The current trend in mortgage rates strongly echoes the early days of the pandemic. In 2020, the supply of mortgages fell sharply as all the most attractive deals were withdrawn together. As economic conditions stabilized, lenders returned to the market with increasingly competitive products. That pattern is repeating itself. After September’s ill-fated mini-budget, 1,500 of the best deals were withdrawn, contributing to a sharp rise in average rates as lenders tried to discourage new business. But as of 2020, realistically priced offers are steadily returning, as uncertainty eases and lenders regain their appetite.
The sharp rise in mortgage rates after the mini-budget was more apparent than real. According to Peter Tsoraula, head of mortgages at Trinity Lifetime Partners, very few deals were completed at the alarmingly high rates of 6 to 7% widely cited in the media. Average rates for mortgages completed in October were actually 3.1%.
Despite the worsening economic backdrop, the UK mortgage market is fundamentally in decent shape. Banks weathered the pandemic well and are still willing to lend at significantly higher rates now on safe assets. The most competitive five-year fixed rate currently available from Principality Building Society is 4.6%. Although the BOE has raised its base rate by three-quarters of a percentage point in the interim, it’s a big drop since I last compared the best deals on October 20, which was 5.39% nationwide. It helps that the job market is the strongest it’s been in 40 years and overall wages are growing at a brisk 6%.
Chancellor of the Exchequer Jeremy Hunt’s autumn statement on 17 November has calmed UK financial markets significantly. That’s an important requirement for lenders whose mortgage offers last six months to complete the often lengthy home buying process. Gilt yields, and the two- and five-year interest-rate swap rates that many lenders reference to price their mortgages, have returned to levels seen in early September before the pension leverage crisis erupted. With 10-year swap rates now lower than five years, lenders have gradually been offering more competitive fixed-rate deals for a decade, especially for more established borrowers.
Nearly all new mortgages in recent years have been with initial fixed-rate terms, so much so that such deals now account for 85% of all housing finance, according to Nationwide. About 1.8 million will need to be rolled over in 2023, about a quarter of the total outstanding, and most will need to be re-signed at higher borrowing costs. Refinancing can be arranged up to three months in advance, and often up to six months if changing lenders, but this does not commit the borrower, only the lender. Better deals can easily be struck before existing arrangements expire, so patience can be rewarded.
The UK’s double-digit inflation, exacerbated by the energy crisis, is turning towards affordability, but this may not last much longer. It helps that household savings were built up significantly during the pandemic. There’s nothing that says house prices can’t go up in a recession, especially on a small, crowded island with ridiculous planning regulations, and the government unable to fix them. Owning real estate in an inflationary environment usually works in your favor.
Mortgage applications have fallen sharply, and will likely fall further as the housing market goes into winter slumber mode even earlier this year. However, actual approvals hold up relatively well. Mortgage brokers report that business is rebounding with a reversal of strong underlying trends before the mini-budget saga. So while momentum has been dampened by unexpected market volatility, there are reasons to suggest it will return in the spring. It is promising that small lenders have stepped up with the best available deals over the past month. The big banks, which have dominated for the past two years, are now lagging behind. The refinancing market alone would occupy already excessive processing capacity.
Demand has increased recently for tracker mortgages, which are set at floating rates tied to the BOE’s base rate and have spreads based on the borrower’s creditworthiness, because initial monthly payments are lower than fixed-rate agreements. This will go up with the official rates, but there is also the possibility that they may come down again in the coming years. And by summer, when most refinances are due, there should be a lot more choice in all the different sizes, terms and types of mortgages.
Since the April 2014 mortgage market review, the nature of UK home borrowing has changed significantly with much more stringent requirements. This has significantly reduced arrears and repossessions. Borrowers are subject to stress tests, in which affordability is assessed at very high potential interest rates. More attention is paid to the loan-to-income ratio than to the percentage of property value. It is much harder to leverage seriously than before the global financial crisis, which has improved the quality of lenders’ overall exposure.
It is too early to get too much bearish on the housing market, which has an extraordinary and persistent ability to weather bad news. The fundamental reasons why UK property is expensive relative to average earnings have not gone away. For homeowners with expiring fixed-rate mortgages, it may be worth waiting as long as possible for more competitive deals to come to market because interest rates are stable and lenders are putting their significant cash balances to work in what is still a safe and attractive market.
More from Bloomberg Opinion:
• UK playing politics with rental market: Stuart Trow
• UK housing market gets desperate once again: Marine Somerset Webb
• Hunt’s fiscal medicine won’t cure UK pain: Marcus Ashworth
This column does not reflect the opinion of the editorial board or Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Previously, he was Chief Market Strategist for Haitong Securities in London.
More stories like this one are available at bloomberg.com/opinion
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