(G)rate expectations | Change in interest rate outlook?
This is as sexy as mortgages get! Could there be a change in the interest rate?
If you can get past the rather poor play of words in the title, there was a large shift in the market last week around expectations of where the Bank of England may move interest rates to.
That naturally leads directly into the mortgage market, so this week, without too much fluff, I am going to dive into what this may mean and what we can expect going forward:
Change In Interest Rate Outlook
As those of us in the financial sector will have seen, data released last week has not only opened the door to an interest rate rise this year, it has almost invited it in via a red carpet.
There is very rarely one event that causes a shift in the market, but I have pulled out the key indicators, what has changed, and what this may mean:
- This is the big one and the main cause of the shift in expectations. The ONS (Office for National Statistics) published figures that showed that unemployment REDUCED in September to 4.5% (down from 4.6% in August). Normally a reduction of 0.1% is rarely going to get any attention but this was the month that Furlough ended. The Bank of England was very concerned we would see a spike in job losses, whereas the opposite has happened. This could be chalked up as a big win for the Furlough scheme but only time will tell if it has been worth the money that was pumped into it.
- Also, wage inflation was on the rise. Earnings were up 7.2% on the same 3-month period to September last year. That isn’t a surprise based on what was going on at that time in 2020, but big steps forward nonetheless. This trend is also set to continue as the ONS expects wages to rise between 4.1-5.6% in the next 3 months compared to 2020.
- The BoE’s argument that inflationary pressures were ‘transitory’ seems to be greatly weakened by the issue we are seeing in supply chains. With doom merchants already concerned there won’t be enough fatty foods and future landfill on the shelves in time for Christmas. With inflation at 3% last month, and set to go over 4% by year-end, it does not look likely this will self-correct anytime soon.
Mortgage Rates have been artificially low for some time
- There has been a fierce mortgage rate war on this year which has driven most of the big lenders to offer sub 1% rates for not just their 2-year, but also 5-year products to attract the best borrowers. The reason being is that more people are refinancing with their existing lender, and an ultra-competitive purchase market with very little stock means less money is moving around the system. So banks are having to cut each other’s throats to attract the low-risk business they want.
- With margins in money markets moving up consistently over the last few weeks (see below) lenders will not be able to offer sub 1% rates for much longer. As a rule, lenders offer around a 0.5% margin above the cost of funds for the best borrowers. With market rates now going over 1% for 5-year money and very close to that for 2 years also, most lenders can not carry on at their current level. You won’t see an immediate spike in mortgages rates as lenders ‘tranche’ funds. That means they buy in large chunks of money or use financial wizardry to hedge this for a period of time. For this exact reason, they don’t have to move too quickly when the market moves. Depending on when lenders last did this exercise, the funds tend to last anywhere between 1-3 months so expect to see movements in the coming weeks. Halifax is the first major lender to increase their rates in forever this week and with such a large player moving first, do not be surprised to see others follow suit. Chasing the best mortgage rate will mean whichever lender is cheapest will then be flooded with applications, so even if they can fund the pricing, they are likely to have to move rates up to maintain service standards.
The main push factor on this is that wage inflation has and is predicted to rise further, above the underlying rate of inflation. So in ‘real terms’ people are better off and will be able to absorb any increase in borrowing costs.
Bank of England making a change in interest rate?
Looks like the market is betting on the Bank of England making a change in interest rate to raise rates in their December meeting, but depending on what happens in the coming weeks, it isn’t ruled out for their meeting on 4th November. There is an argument to move rates from 0.1% back to 0.25% as an early warning shot in November so it does not dampen the mood coming into Christmas. But economists make these decisions so who knows!
There is also another rate rise predicted in the first half of 2022 to take the base rate to the dizzying heights of 0.5%, but no doubt there will be a wait-and-see approach on the first movement. While it won’t be an issue from a cost perspective, it is quite symbolic so time will need to be taken to assess any impacts and also review those 3 key data points as they change.
Another very long story for another day is how crippling we are in debt as a nation (both on a personal and public level) and higher interest rates are badly needed to promote more saving.
That does mean though that rates can’t go up too quickly, or too soon. If anyone has seen or knows the setup to Squid Game, you’ll know the impacts heavy debt has on people. While that TV series is extreme fiction, it does bring to life how many people may be feeling after losing work and income over the pandemic. But that is a tale for another day…
Not much more than can be added to the above!
Therefore, our default position stands, unless you have any specific needs, we would most likely recommend a longer-term fixed rate if you have a 25% + deposit/equity, but keep it short term or flexible if less than that figure.
In the last week:
3 Month Sterling = up by 0.039 at 0.125%
2 Year SWAP = up by 0.171% at 0.927%
5 Year SWAP = up by 0.046% to 1.076%
Bank of England Base Rate = Held at 0.10%
Best Mortgage Rates
2 Year Variable from 0.85%
2 Year Fixed Rates from 0.79%
5 Year Fixed Rates from 0.91%
BTL Rates from 1.00%
The actual rate you will be offered will be dependent on your personal circumstance and deposit level. Please speak to one of our advisers so that they can guide you through this process
Source: Twenty7Tec October 2021
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