Mortgage Market Outlook | Q3, 2023

This last year, mortgage customers have faced a tirade of consecutive interest rate hikes and market uncertainty.

Such a dynamic backdrop has caused a conundrum of challenges, many of which most younger homeowners have never experienced first-hand.

Interest rates stand at an all-time high, with potentially more increases to come. As such, it's crucial that lenders support the flexible labour workforce.

We, as an industry, must supplement that support by providing accurate guidance, communication and flexibility amid the ongoing economic challenges.

Today, we look at:

• how and why the mortgage market got to where it is;
• what we can expect in the short- to mid-term;
• what independent professionals can do to mitigate the varying levels of impact.

The elephant in the room: you're going to pay more for your mortgage

As many as 1.6 million fixed-rate mortgage deals are due to end before the end of 2023. Most borrowers tied into those deals will face a rise in their costs, and a steep one, at that. Homeowners face hundreds, or even thousands of pound increases in their monthly repayments.

This almost unprecedented upheaval means it's critical that contractor-borrowers whose initial fixed-rate period is due to expire take action as early as possible.

The government and Martin Lewis have helped with the introduction of the Mortgage Charter. With these interim measures, homeowners can lock in a new mortgage deal up to six months ahead of their current deal ending without penalties.

Acting swiftly and confidently is key. That's because as fast as lenders advertise deals, the market supporting those deals changes. As a result, lenders pull those mortgages from the shelves, often without notice.

Even more important is using a broker to get to the underwriters who understand professional contractors' income structure to get you a mortgage. They have direct lines to specialist underwriters, which could save you heartache as well as time and money.

Any delay in the application process can fatally scupper your chance of getting a deal that reflects your status. Or, in today's fast-moving housing market, could prevent you from getting a mortgage at all!

The recent dip in interest rates is (probably) not the start of a trend

Average residential two- and five-year fixed rates have, in very recent days, come down slightly. This is the first time both rates have fallen since May.

We can view this slight decrease in mortgage pricing by some lenders as positive. But let's not get carried away. This should not be seen as indicative of widespread downward movement! In real terms, lenders have predominantly been increasing their interest rates, not reducing them.

The market rates are still significantly higher than this time last year. Anyone due to renew their mortgage should still be looking well in advance of their fixed rate ending to lock in the best rates.

The 'snapshot' sentiment of slightly-reduced rate may have improved slightly. But it's worth repeating: one slight dip won't translate into major lenders repricing downwards.

Contractors and freelancers are not alone: price hikes are universal!

We know you're concerned. We receive phone calls and emails from our customers daily asking if they should hold off applying for a remortgage. Do they gamble and hold out for a potential rate reduction over the coming months? Or should they lock in a deal now?

If you want the comfort of a set amount you can budget for, the answer is 'Yes! Do it now!'

Secure a rate as soon as you can. We can always switch to a better rate should any become available down the line. This is what we've been advising our clients all along, and will do until we see signs of a confirmed, sustained drop in interest rates.

What about UK Inflation falling more than expected to 7.9% in June?

ONS reported that the CPI measure of inflation dropped to 7.9% in the year to June. The City breathed a huge sigh of relief. The news is a boon for the Prime Minister, Chancellor and the governor of the Bank of England.

Despite this, there'll likely be no immediate impact on mortgage rates or our disposable income. We're still feeling the effects of the inflation rate peaking at 11.1% in October 2022, its highest rate since 1981.

It's too soon to celebrate

Relief that the numbers finally seem to be going in the right direction will be scant consolation and short-lived for policymakers and politicians. They know that the average household will be cool about cooling inflation. At 7.9%, prices are still rising considerably, year-on-year.

Ahead of an election year, the Electorate just wants prices to go down. With one or two exceptions, we're miles away from mitigating the Cost-of-Living Crisis. But will the current government care enough to do anything about it?*

We need to allow reduced inflation to impact shelf prices and interest rates before we can start celebrating! This time next month, we may have a clearer understanding of our economic position for the rest of 2023.

A smaller base rate hike in August is expected from the BoE

Those UK inflation figures have somewhat swayed investors' expectations of another 0.5% base rate rise at the Bank of England's next meeting on August the Third. All eyes will be watching.

Inflation is important to homeowners because it's one measure that can influence the Bank of England base rate. The Bank generally raises its rates to combat inflation if inflation gets too high.

The rationale is this: if borrowing is more expensive, people have less money to spend. Therefore, there is less demand for goods and services. Decreased demand then prompts businesses to reduce prices/consumers to spend less, bringing inflation down.

The base rate also determines the rate at which The Bank lends to financial institutions and banks. After its 13th consecutive rise, the base rate currently sits at 5%, the highest since 2008 (the fallout from the Financial Crisis).

The drop in inflation may temper rather than halt the next base rate rise

Prior to June's drop in inflation, investors and experts expected The Bank to raise the base rate from 5.0% to 5.5% in August. Now, The Bank is less likely to have to raise interest rates, or at least by as much.

A rate rise is still on the cards for August, but it might be by 0.25 percentage points rather than 0.5.

Looking beyond August, the expectation is for rates to top off at 5.75% rather than >6%, which experts had posited before.

Too much global volatility means there are no guarantees

In all honesty, no one accurately knows where rates will settle. There's too much global volatility and uncertainty that can affect The Bank's decisions. We have a long way to go before we see steady reductions in mortgage pricing.

Yes, data shows that the battle against inflation in the UK is improving. But, I still expect the Bank of England to continue its aggressive interest rate hiking agenda at the MPC meeting in August.

They will insist that, although inflation is decreasing, it is so only gradually. It remains sticky—still the highest in the G7—and a long way from the government's original 2% target.

Swap rates: why we've seen hide-and-seek mortgages

The Bank of England's base rate mainly affects lenders' base rate trackers and their SVRs. For initial fixed-rate period mortgage pricing, lenders typically take their cue from swap rates. Here's why they're important.

Swap rates show where the money markets believe rates will settle in the medium-to-longer term. As swaps increase, fixed-rate mortgages typically rise too.

On the other hand, if swaps fall, fixed-rate mortgages consequentially decrease.

When lenders price fixed-rate mortgages, they buy a tranche of money at a certain rate, upon which they base their interest rates. They then lend against that unit cost plus their margin.

But if those rates are volatile and changing quickly, as we've seen recently, lenders can't accurately calculate/predict the cost of funding. And that's why we've seen so many lenders withdraw their fixed-rate products so soon after launching them.

Swaps levelling off for the first time in weeks

Following Liz Truss's disastrous mini-budget in September 2022, swap rates spiralled. As a consequence, the average two-year fixed-rate mortgage shot up to 6.65%, where it peaked.

However, the medium-to-long-term swap rates had been falling since November's Autumn Statement 2022. The subsequent expectation was that the average fixed rate would settle around 4.5% to 5.0% by mid-2023.

But those fixed rates rose sharply again at the end of 2023's second quarter in tandem with rising swap rates. We've since experienced lenders frantically pulling their fixed-rate mortgages, repricing them upwards. No sooner were we in Q3 than the average fixed rate again rose to the peaks we saw following Liz Truss's mini-budget.

Since early- to mid-July, swap rates have once more shown signs of levelling off. This historically suggests that a reduction in mortgage rates could be "on the cards"; well, that's the theory.

Despite recently-erratic swap rates, there are initial signs that this tide may be starting to turn. The market may yet see lower rates than previously thought, but it remains sensitive to a myriad global factors, most of which are beyond the UK's control.

Time will tell if the market will sustain a period of reducing swap rates, but the question remains:
will lenders commit to reducing rates as quickly and as frequently as they've been increasing them?

Again, we'll have a better idea in the coming week and months.

Affordability concerns continue to dampen property transactions

Property transactions showed signs of recovery during the first half of this year. But the trend was disrupted in late June/July by continued fluctuation in interest rates, mortgage availability and affordability.

These factors have had an inevitable knock-on effect. Property purchase transactions for first-time buyers and homemovers across the UK have all but flatlined.

On the surface, this suggests a recalibration taking place within the property market and in our mindsets. Potential buyers are adopting a wait-and-see approach before committing.

Activity will only flow through the pipeline once the market finds a balance between interest rates, inflation and the cost of housing. This includes acknowledging that it will be years before we see sub-2% mortgage rates, if ever.

Stop dwelling on past rates and deal with the mortgage market we have today

The message we're getting from mainstream lenders today is harsh, but relevant. In short, they're telling us that the:
"world [of cheap money] no longer exists; get used to the new norm!".

In a recent exclusive online masterclass with some of the leading mainstream lenders, we discussed the current mortgage market. The experts gathered therein stated that it is unlikely we'll see a return to pre-mini budget rates.

The advice was blunt, and may appear blunter still to homeowners and first-time buyers. In short, they advised that mortgage advisers get on with scouring options to get the best outcomes for their clients in the here and now.

The world of sub-2% mortgages, which many looking to remortgage will have, is nought but a footnote in (recent) history.

Are lenders profiteering?

What many mainstream lenders shy away from discussing is the substantial increases in their "net interest income". Net interest income is the difference between what lenders charge borrowers and pay out to savers.

Why should this be pertinent to today's discussion? Because the top four lenders have made an extra £8bn from rising rates.

Waves of mortgage brokers have come forward to accuse the banks of profiteering.

Even the head of the FCA has raised concerns, saying that loyal customers were being ripped off by banks refusing to raise savings offers even as interest rates climb.

Banks should not be using the mortgage crisis to boost profits. Such profiteering amounts to greed-inflation. The FCA needs to monitor this situation more closely and take action if there's any sign of wrongdoing, moralistic if not illegal.

Ask for help if you need it

Inflation is still far higher than its original 2% target. It's debatable whether it will reach 5.55% by the end of the year, Rishi Sunak's 'personal' pledge, which he made in January.

The Bank of England is also relentlessly ramping up interest rates in a bid to slow spending.

While some homeowners remain immune to the series of hikes, many are already feeling the pinch. Of the 1.5M+ fixed-rate deals coming to an end this year, many are locked in at less than 2%. When you compare that to the new average fixed rate of >6%, there's a whole new round of hurt just around the corner!

Many homeowners will be asking themselves if they should:

• secure a new deal,
• switch to a tracker deal until they see an interest rate they like, or
• stay on their lender's SVR until rates drop.

These are the burning questions, but there's no one answer that covers all eventualities.

You're unique: use that difference to stand out to a potential lender

Everyone's personal situation is unique and relevant to them. For me to try to provide a one-size-fits-all answer would be folly.

I urge contractors whose fixed-rate mortgage deal is due to expire in the next six-to-eight months to consider their situation. The first step is to engage the services of an independent mortgage broker who can scour the whole market for the best borrowing options.

You should also make sure the information on your credit report is correct and up-to-date. Credit reports are often free to complete and could save you thousands. Make no bones about it, lenders will save their best mortgage offers for those with the best scores. You want to be in that mix!

Mortgage rates will decrease in a slow arc, not drop off a cliff

I've no doubt mortgage rates will reduce eventually. But it will take time. We're more likely to see lenders hold and take a breath than jump into reducing rates.

Even then, it's more likely that smaller specialist lenders, including building societies and challenger banks, will spearhead rate cuts. Mainstream high street lenders will join the party eventually. But, they have got more to lose if rates go wrong.

*In true Jeremy Hunt fashion, the Government has ruled out the provision of financial assistance for struggling mortgage customers. However, the FCA has ordered banks to support those who need it.

As mentioned earlier, lenders who've signed up to The Mortgage Charter will have non-punitive options if they're struggling. These include moving to reduced monthly payments (interest only) or extending your mortgage term.

Remind. Rinse. Repeat.

I don't mind playing the devil's advocate, here; people who've followed this blog or our partner site articles will know that. I'd rather help homeowners bring some stability to their finances than blow smoke up their chimneys.

By highlighting how bad things might get beforehand will potentially prevent you from having to scramble to keep the lid on your finances down the line.

Hopefully, my pessimistic view is proven wrong; but, let's see.

True to form, I'll finish as I always finish. But this message is more appropriate now than ever. Contractors, to maximise your mortgage chances in this still far-from-predictable and still potentially volatile market, do not go to a lender direct.

Speak to a specialist contractor mortgage broker first. The call will save you a lot more than cold, hard cash! Thanks, as always, for your time. We look forward to hearing from you.