Mortgage Market Update – 2022 Review

Mortgage Market Update – 2022 Review

Founder of Rose Capital Partners

I think I can summarise 2022 by the following statement – Just when you thought it was safe to get back into the water, Liz Truss happened…

While many of the issues we are now facing (high inflation, rising interest rates, jobs cuts and business failures) were all risks well before the now infamous mini-budget, there is no doubt that it poured fuel on the fire. However, despite the particularly depressing news cycle we are in, I feel there are reasons to be optimistic about 2023 and specifically the housing and mortgage market in London and the South East. I am going to look back at the key themes we saw last year so we can try to plot a safe path through 2023…

Is Now The Best Time To Buy?

It may seem odd to suggest buying now is a good time to buy, but I feel the stats back it up. Again, I am looking specifically at London and the South East, the story may well be different in other parts of the UK but as this is our core market this is what I will focus on.

As house prices in the Capital are still around 2016 levels there is only so much further they can go down. Indeed a Savills forecast for the years ahead suggest Prime Central London will only drop this year by 2%, but then go up 2% in ’24, 5% in ’25. 4% in ’26 and 4% in ’27, making a compounded gain of 13.5% over 5 years. Not bad at all. So, while every financial forecast I have seen since 2016 has been dead wrong, it does give you a feel of the direction of travel. Which is unless anything unforeseen happens, all commentators I have seen are predicting a small dip this year, with the market recovering in later years, hence my assertion now could well be the best time to buy in the current cycle. Interest rates are coming down (more on that below), lenders are keen to lend, we are expecting more property to come to the market this year and soft prices, which all equals ‘buyer market’ conditions. The smart people will take advantage of that.

I believe that also creates a big opportunity in the Buy To Let market. You just have to read any property news to know rents are shooting up due to lack of available rental properties. In parts of London you can now achieve 5-10% yields (and even higher elsewhere), so if you factor in the ‘compounded return’ of both the rental income + house price increase, property is starting to look a much better bet again. Plus, you have the advantage of being able to easily leverage the property. In a simple example, say you have £100,000 you can invest and are looking at what you can do with that money. You can just invest in equities/fund/pension etc and if you got an 8% return (£8,000) you would have done exceptionally well. An alternative would be to buy a Buy To Let. If you do that, you can use the £100k as a deposit on a £400k purchase, which means you get the benefit of the full asset value not just the equity. Even on a modest rental return of 5% (£20,000 per year) and a 13.5% return over 5 years on £400k purchase price (roughly £54,000 + 5 x £20k = 100k, therefore a gross return = £154,000). It isn’t as simple as that as you will have interest charges (likely to be 4% of the loan {assuming a loan of £300k on an Interest Only basis} = £12,000 per year) and tax to pay (as you may in other forms of investment), but a rough return of £94k over 5 years, vs aprox £40k on traditional investments deserves to be looked at. I would stress this is very crude workings as tax and risk are major factors to be explored. However, with good rental yields and growth expected in the coming years, all I am doing is pointing out that BTL looks a good asset class again as you retain a bricks and motor investment and if purchased through a Ltd Co, it can be quite a tax efficient vehicle also.

How Has The Change In Interest Rate Outlook Change Our Advice?

The major shock of last year was the sharp change in the interest rate outlook from September onwards, due to the ‘Mini-Budget’ which I alluded to earlier. Indeed the products we recommended, and continue to recommend, have changed significantly as a result of that. The table below explains that very well.

In fact this graph sums up the year very well – we were cruising along nicely until it all changed in late September/October. In these 2 months there was a huge rush to get in on the last ‘cheap’ fixed rates. If you got one of those or arranged your mortgage earlier, well done! From late October onwards we saw fixed rates at 6-7% which seemed unthinkable just a few weeks before. This then created a gulf in pricing between Fixed rates and Variable rates. I suspect if you draw this graph back from Sep ’22 back to about late 2010 it would show much the same picture, as fixed rates have been so low for so long, why wouldn’t you fix for 2 – 5 years as was the norm for a very long time. When the base rate was at 2.25% in late October, but the best fixed rate you could have got was 6%, that looked awful value. However, there were Variable rate options that were still sub 3% at that time, hence the huge swing in products we recommended after that point. More specifically, there is still a lot of value in Variable rates that start from 3.29% on Discounted Products (which you can read more about here why that is the case if you are so inclined). We have also very recently seen a lot of lenders come in with very cheap Tracker products which are also penalty free, so you can hedge your bets on a lower rate now, but have the ability to exit penalty free onto a fixed rate should the market take a turn for the worse, hence the huge spike in Tracker deals we are doing of late. This trend is set to continue well into the new year and I will expand on why below

Mortgage Market Update – 2022 ReviewMortgage Market Update – 2022 Review

What Are We Expecting For Interest This Year?

So that is the past, but what does the future hold? I wish I knew! But all things being equal, what we will see this year is interest rates top out in the current cycle. That could be as low as 3.75% or as high as 4.25%, so the base rate is likely to settle around 4% in Q1. Please see money market data below for more detail on that. What we are also seeing are fixed rates come down markedly from their high in October. Indeed you can now get a 5 year fixed again for under 4.5%. With the base rate at 3.5% and predicted to go slightly higher, that now looks good value again (as a 1% margin above cost of funds has always been about right for a well-priced mortgage product). Again, I do feel that variable rate mortgages offer better value, as if they are nearly 1% cheaper than their fixed counterparts, and no-one is predicting the base rate to go up that much, purely based on the numbers that looks to be the way to save the most money on your mortgage if you need to arrange a new deal in the early part of this year.

My view may well change on that as the year progresses, as if fixed rates keep coming down and the base rate goes up, you may reach a point where there is little or no difference between fixed and variable rates again. In which case the vast majority of clients opt for the certainty of a fixed rate, and why not. This is the No1 market dynamic we will be keeping an eye on as the year progresses so we can give the best advice we can to our clients.

Summary

Now more than ever, people need high quality advice. There are many technical factors involved in finding the right mortgage product for *you*. As illustrated above, the product choice coupled with lender criteria understanding is crucial. There are also a lot of moving parts as house prices are soft, the Bank of England look set to raise rates further but yet mortgage pricing is still coming down after the shock of the ‘Mini-Budget’. The good news to take away is that lenders are not changing their criteria, meaning they are still offering 95% mortgages and lenders are coming back to offer 5.5 x income again (albeit you will most likely need a 15% deposit + to achieve that income multiple, but all lenders are offering 4.5 x your income), so on our side of the fence things are getting better, not worse, which can’t be said for all parts of the economy this year. As they say – fortune favours the brave – and I suspect that will be the real story of 2023.

Money Market & Mortgage Rates

Mortgage Market Update – 2022 Review

  • 5 Year money up 0.166% to 3.954%
  • 2 Year money up 0.047% to 4.319%
  • 3 Month Sterling Libor up 0.206% to 3.862%
  • UK Base Rate up 0.50% to 3.50%

Source: chathamfinancial.com & globalmarketrates.com

Market Leading Mortgage Rates:

  • 2 Year Fixed Rates from 4.61% (previously 5.00%)
  • 5 Year Fixed Rates from 4.31% (previously 4.84%)
  • 10 Year Fixed Rates from 4.40% (previously 4.89%)
  • Variable Rates from 3.29% (previously 3.29%)
  • Buy To Let Rates from 3.69% (previously 3.24%)

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 January 2023