The mortgage market is a silver lining in the UK cost of living crisis -

Commentary

There’s plenty of financial doom to be found perusing the UK consumer news these days. Dire consequences of the cost-of-living crisis aside, however, the outlook for homeowners who need to refinance their mortgages is improving significantly – good news for both the housing market and consumers.

With 85% of mortgages at fixed rates, but most of them only lasting for two years, there would always be a score to settle as the Bank of England raised official interest rates last year to 3.5%. from almost zero. But mortgage rates have fallen from their November peak even as the central bank has continued to tighten policy.

The premium that lenders charge for taking on individual borrower risk compared to market interest rates is lower now, around 100 basis points above the BOE rate. It had widened to more than 250 basis points after the derailment of Liz Truss’s fiscal plans in September. In addition, there is a substantial increase in the number and variety of mortgage offers available.

In the UK, lenders typically commit to a mortgage offer for six months, giving buyers ample time to navigate the legal process. Lenders ran for the hills as underlying gilt yields began to rise rapidly, withdrawing products. Until the market calmed down, many small lenders resorted to offering priced rates to essentially avoid business, driving up the overall average rate even though very little business was actually done at these elevated levels. According to data compiled by retail financial data firm Moneyfacts Group Plc, a tally of the best two-year fixed rate deals available from the UK’s six biggest lenders who provide more than 70% of home loans shows that always it was possible to secure a rate just below 6%.

The picture for mortgage availability has improved dramatically, despite the fact that the BOE has doubled interest rates since the end of September. There are over 3,600 mortgage products currently on the Moneyfacts website, up from 2,250 in October. The average life of a mortgage product fell to 15 days, the lowest ever recorded, but, unlike in October, this is due to lenders lowering the rates offered to be more competitive.

The market’s previous preference for two-year fixed-rate mortgage deals is quickly transforming into demand for five- and 10-year deals. It helps that the yield curve for interest rate swaps, where lenders hedge their net exposure, has inverted with two-year swaps currently at 4.32%, five-years at 3.86% and 10-years at 3.60%. Banks and mortgage lenders are in good shape, and with interest rate volatility dwindling, they are competing harder for business at a time when demand for mortgages is relatively subdued.

Nationwide Building Society offers two-year fixed deals at 4.84% and five-year money at 4.43%, though even lower rates are available from smaller lenders who have decided it’s safe to get back in the water. Lloyds Banking Group Plc is offering a 10-year 4% agreement. It is even possible to get a buy-to-let offer for the owners at a similar level. Variable tracker offers, which are linked to the BOE base rate, are available at 3.74% from Barclays Plc. One-year unsecured personal loans on a credit card are available at rates as low as 3.5%. The body language of lenders is that they clearly don’t expect interest rates to go much higher and want to build their loan portfolios at these levels.

The improving mortgage market provides little comfort to borrowers who will see the percentage of their income spent servicing their home loans skyrocket, given that more than half of the 1.4 million fixed-rate mortgages maturing this year will have to be refinanced at double your current borrowing costs. But at least the worst case of rates of 6% or more has been avoided. While that won’t stop house prices from correcting lower after a stellar run since the pandemic, it should at least ameliorate the recession.