Mortgage Market Chaos
The combination of the increase in Bank of England base rate to 2.25% on the 22 September and Kwasi Kwarteng’s mini budget on the 23 September have resulted in mortgage lenders withdrawing products with little or no notice and either leaving the market for a short period or launching new higher-priced replacements. My article this month is aimed at providing clients and others with guidance about what the future might hold and to suggest ways in which the worst effects of rate rises can be mitigated.
Bank Base Rate History
Since 2008 we have become used to a Bank of England base rate which is low by any historical measure. Here are the rates that applied at 10 year intervals beginning in 1982 –
Bank Base Rate %
- October 1982 = 9.63%
- October 1992 = 7.88%
- October 2002 = 4.00%
- October 2012 = 0.50%
- October 2022 = 2.25%
Bank base rate reached a high of 17% in October 1979 and was over 10% for much of the late 1970s and early 1980s and was at 10.38% as recently as October 1991.
Bank Base Rate Forecast
I don’t know what the future holds in the short and medium term for Bank of England base rate and it is clear from reading the financial papers over the last week that neither do economic commentators. There does seem to be some consensus that the rate will end up somewhere between 5% and 6% by mid 2023. Whilst that sounds desperately expensive compared with the rates we have enjoyed since 2008 the forecast figures are still at the low end when looking at the longer term historical perspective.
Borrowers with Fixed Rate Mortgages
As a company our advice to clients with fixed rate mortgages has historically been that it does not make sense to move to a new deal during the fixed rate period when the lenders’ early repayment charges apply.
Many lenders have a sliding scale of early repayment charges which reduce the longer a fixed rate arrangement continues. As an example a 5 year fixed rate mortgage might have an early repayment charge of 5% of the loan in the first year of the deal reducing to 1% by the beginning of the fifth year. In that type of situation it might now be worth suffering that reduced penalty and “buy” a new fixed rate deal if Bank of England base rate is to rise between 5% and 6% as many commentators suggest. My message is either talk to your lender or broker and do the maths.
Long Term Fixed Rate Mortgages
My company have been recommending 5 year fixed rate mortgages to clients for some years as long as customers expect to be in the UK housing market for at least that period of time.
There are two reasons: Firstly fixing the rate provides certainty for a significant period of time and secondly transaction costs are kept to a minimum. Each time a product switch or remortgage takes place there will be a lender product fee (allow £1,000) and there might also be a mortgage valuation fee and solicitor’s costs to pay.
Despite what I have said above it is likely that we will all suffer a reduction in our standard of living because mortgage costs are just one of our monthly outgoings, albeit significant, and we are also seeing rising costs in gas, electricity and fuel for our cars.
In the short term we might all have to get used to trading in our cars and mobile phones a little less often and eating out less frequently.
Even with a careful look at expenditure there will be customers who suffer financial hardship as a consequence of the increase in monthly mortgage payments. If you are in that position it is important that you engage with your lender without delay. Lenders understand what is happening in the market as well and being on the front foot in such situations is likely to result in them being more accommodating. As part of that process, if you are talking to lenders, it is important that you approach them armed with a very clear understanding of your monthly outgoings and let lenders know what you are doing to try to make economies.
Usually lenders can offer two solutions:-
- Subject to your age they might agree to extend the mortgage term so as to reduce the monthly payments. Please remember that in this instance the mortgage capital outstanding is being reduced more slowly and the total cost of the borrowing increases.
- Lenders may also offer an interest only concession for those loans (the majority) currently on a capital and interest basis. Such concessions are only a short term solution and typically are granted for six or twelve months.
As usual every care has been taken in the preparation of this blog but the contents are not to be regarded as bespoke advice. To obtain personalised help please contact one of us or your mortgage lender.