Following an avalanche of rate cuts, the mortgage industry should brace itself for a possible upward turn as lender costs and inflation rise, experts advise
The trend for mortgage rate cuts is coming to an end and both brokers and clients should prepare for hikes this year, according to industry experts.
Meanwhile, lending giants including HSBC, Nationwide Building Society and Yorkshire Building Society have taken the axe to rates and announced best-buy contenders in recent weeks, largely driven by strong competition. At the start of this month, Tesco Bank even launched what some have labelled the lowest-ever five-year fix, at 1.78 per cent with a £995 fee, for borrowers with at least a 40 per cent deposit or equity.
So just what’s next for mortgage rates? And what will it mean for brokers and borrowers?
On the base-rate front, although last autumn there was talk of further cuts to the historic-low rate of 0.25 per cent, in fact opinion has since swung the other way, with sentiment now suggesting the next change will be upwards. Depending on whom you believe, however, this could happen any time between now and 2019.
This market shift has led to a rise in swap rates – which influence fixed-rate mortgages – putting lenders under pressure through inflated funding costs.
As a result, Andy Knee, chief executive of conveyancing specialist LMS, thinks this year
we could see the back of record-low rates.
“Mortgage rates are likely to rise in 2017,” he says. “Homeowners should take advantage of low rates and remortgage, to secure reduced monthly repayments while they still can.”
Legal & General Mortgage Club director Jeremy Duncombe agrees that the risk of rises this year means borrowers should act now to snap up a good deal.
“The age of low interest rates is certainly not over but there’s no question that rates will eventually rise,” he says.
Commenting on the buy-to-let market, Mortgages for Business chief executive David Whittaker adds: “With rising swap rates, we would expect increases at some point in 2017.”
However, despite the views expressed above, several commentators tell Mortgage Strategy they do not envisage imminent jumps. John Charcol product technical manager Simon Collins says: “We don’t necessarily expect sharp increases in the near future but neither do we see any major benefits in waiting to remortgage, especially for those wanting longer-term payment security.
“There’s no clear pattern emerging, hence we think the markets are likely to carry on in the same vein for the next few months. Once we get a bit of meat on the Brexit bones, that may focus borrower sentiment a bit more.”
London & Country associate director David Hollingworth also doubts whether there will be rate increases in the short term.
He says: “There are bound to be some ups and downs in expectation but it would be a surprise to see competition in the mortgage market ease off. That should ensure that mortgage rates remain as keenly priced as they can be.
“But in a year when Donald Trump has taken the reins in the US and Article 50 will be triggered in the UK, any crystal ball is potentially even more opaque.”
Those “keenly priced” deals include some from lenders seeking to emulate Tesco’s ultra-low five-year fix, such as HSBC at 1.79 per cent with a £999 fee at 60 per cent LTV.
There has been movement in two-year fixes too, with Yorkshire’s new 1.16 per cent rate – with a £1,495 fee at 65 per cent LTV – topping many best-buy tables at the time of writing. However, two-year rates are not at record lows, unlike their five-year counterparts.
Even so, these hot deals will not last forever. While swaps movement is largely behind the rate-rise forecasts, they have not soared suddenly over recent weeks but have risen slowly since last summer.
In early August, two-year swaps stood at about 0.4 per cent; they are now at around 0.7 per cent, although they steadied in January. During that time, however, mortgage rates have fallen.
So the pressure on lenders’ balance sheets is clear. Some are offering cheaper mortgages but, where they borrow from the money markets, they are having to pay more themselves.
One factor creating upward pressure is rising inflation, which makes a base-rate rise more likely, which in turn means swaps rise.
In addition, the weak pound makes imports – and therefore many everyday goods and services – more expensive.
In fact, rising air fares and food prices have pushed inflation to its highest level since July 2014. The most recent Consumer Prices Index figure shows it rose by 1.6 per cent in December, up from 1.2 per cent in November.
In one prediction, annual growth will average 3.3 per cent across 2017, according to the National Institute of Economic and Social Research.
As swaps were already on the up towards the end of 2016, many experts at the turn of this year predicted rate rises in 2017– before the recent cuts.
It was not just rising swaps creating that feeling; some best-buy mortgage rates rose in December. The move that grabbed the greatest share of column inches was arguably HSBC’s dumping of its record-low two-year fix at 0.99 per cent.
Although some rates have since fallen back again – in the two-year fixed market at least – they have not returned to such lows. Long-term fixed rates also jumped towards the end of 2016.
In fact, average rates fell in December and January, while two-year fixes rose at the start of February, showing that the keenest competition is on five-year deals.
Figures from data supplier Moneyfacts show that average two-year fixes stood at 2.34 per cent in November and were unchanged in December, but fell to 2.31 per cent in January, then climbing slightly by one basis point at the start of this month. The data also shows that average five-year fixes have fallen for the past few months.
The steadying in swaps that occurred during January gave lenders breathing space to cut their rates, although the main influence appears to be lenders’ appetite to grab market share.
“Competition remains a key driver in the market although, of course, funding costs cannot be ignored,” explains Hollingworth.
“Lenders have been cutting rates to the bone to develop as strong an offer as they can. That has helped not only borrowers with large deposits but also those further up the loan-to-value scale, where rates have improved too.”
Cherry Mortgage & Finance broker Matthew Fleming-Duffy agrees. “Swap rates do not appear to have moved significantly downwards over the past few months so we must assume these rate cuts relate to lenders vying for market share.”
SPF Private Clients chief executive Mark Harris adds: “An appetite to do business among lenders shows no signs of abating.”
While none of the big banks or building societies contacted by Mortgage Strategy were willing to be specific about the effect of competition on their pricing policies, an insider at a major lender confirmed brokers’ beliefs, saying: “Competition can play as big a part as what is happening on the markets.
“It can take one lender to lower its rate because it wants to hit a lending target and then you get a domino effect as others do not want to be left behind further down the best-buy tables. As there is still plenty of appetite to lend, this is competition in action.
“That first mover must also be careful not to go too low and get swamped, while another consideration for lenders that also offer savings product is the impact on them. If one reduces its mortgage rate too low, it may need to lower its savings rate to pay for it, so it can be a fine balancing act.”
Yorkshire BS offers some insight. A spokeswoman says: “Swap rates play a big part in determining mortgage interest rates but they are also affected by a number of other factors, including base rate, currency values and the general economic and political environment.
“Like all mortgage providers, we have some flexibility in the type of lending we want to advance at any time.”
In terms of the bigger picture, the Council of Mortgage Lenders predicts only tiny growth in lending this year, to £248bn from £246bn in 2016, largely due to economic uncertainty.
One school of thought is that, if rates were to rise, this could stimulate demand, which might push higher that conservative figure for 2017. While record-low rates themselves undoubtedly entice borrowers, so too could the fear of their disappearance, it is claimed.
Knee says: “Remortgaging was driven by record-low rates throughout 2016, enabling homeowners to make large savings to monthly outgoings. Anticipation of interest rate rises in recent months has also encouraged more people to remortgage, with many opting to fix for longer.”
A closer analysis of rates by Moneyfacts shows that banks offer a poorer deal than building societies, highlighting that over time they may not have cut rates by as much as their mutual counterparts. In late January, societies bettered banks on two-year fixes at 95, 75 and 60 per cent LTV by a percentage point margin of 0.4, 0.58 and 0.25 respectively.
Moneyfacts finance expert Charlotte Nelson said at the time: “It seems that, despite mortgage rates falling to record lows, banks are still failing to compete on cost.
“The domination of building societies is clear when you cast your eye over the best-buy tables, with five of the six two-year fixed-rate mortgage best buys being offered by mutuals.
“More importantly, the lowest deals aren’t reserved for just those with larger deposits; building societies are hitting it out of the park for those with smaller deposits too.
“They also have a lot more flexibility when it comes to underwriting, allowing them to opt for a more personal approach.”
Appetite to lend
Regardless of who wins the bank versus building society war, there appears to be no let-up in appetite to lend among home-loan providers of all types.
As the UK’s period of economic uncertainty continues, for now at least there are few of the violent pressures that led to the sharp slowdown in lending in 2007/08 that ultimately produced the credit crunch. Lending is still widespread, even if criteria have become tougher.
Although house prices have continued to rise, causing first-time buyers to struggle, rates for homeowners are far lower than during the financial crisis, easing household expenditure.
However, borrowers have got used to low mortgage rates and may have adjusted their budgets accordingly. They are likely to feel the pinch when rates eventually rise.
The role of a good broker in finding them the best deal remains as important as ever.