What’s next for the mortgage market

CHANGE OF SITUATION ILLUSTRATION

Key takeaways

  • Product choice fell at the fastest pace since the early pandemic during March, with more than 500 products withdrawn
  • Mortgage rates are rising across the board following three back-to-back increases to the Bank of England base rate
  • The average rate charged on an SVR is 1.96% higher than the average interest rate for a two-year fixed-rate mortgage
  • The mortgage product shelf life has dived from an average of 42 days to just 28 days during the past month

Three back-to-back interest rate rises have left the mortgage market in a state of flux. As you gear up for the busiest period of the year in terms of remortgages, here’s what you need to know to help guide clients.

Choice is falling

Mortgage choice fell at its fastest rate during the past month since May 2020, during the early stages of the Covid-19 pandemic. A total of 518 mortgage deals were withdrawn, as lenders pulled ranges to reprice them.

Product choice fell across all loan-to-value (LTV) brackets, with the exception of the niche 95% LTV sector, which saw a small uptick in availability with seven new deals added, bringing the total to 342.

In a sure sign that lenders are feeling more cautious, some providers pulled their entire range in certain LTV brackets, while one lender temporarily withdrew all of its products.

Rates are rising

Falling product choice is not the only challenge the mortgage market currently faces, with average mortgage rates also increasing.

Unsurprisingly, given the three interest rate rises made by the Monetary Policy Committee to the Bank of England base rate since December, mortgage rates have gone up across the board during the past month.

The average cost of a two-year fixed rate product across all LTVs now stands at 2.65%, the highest rate since November 2015. Meanwhile the typical rate charged on a five-year product is now 2.88%, the highest level since April 2019. Average mortgage rates have risen for all LTV tiers.

Margins are widening

Not only are mortgage rates rising, but lenders are also taking the opportunity offered by the increases to the base rate to claw back some margin.

The average cost of a two-year tracker rate product has risen by 0.45% since December, compared with a cumulative increase to the base rate of 0.4%.

Fixed rate products have fared slightly better, as rising interest rates were anticipated and already factored in. As such, the typical cost of a two-year fix has increased by 0.31% since early December, while five-year ones are up by an average of 0.24%.

As a result, the average premium borrowers pay for the security of fixing for five years, rather than two, has narrowed, to stand at 0.23%, down from 0.31% a year ago.

Avoid lingering on SVRs

While there has never been a particularly good time for clients to linger on an SVR, it is currently an especially bad time. Despite mortgages rates increasing pretty much across the board since the first increase to the base rate in December, the incentive to switch is still high.

The average rate charged on an SVR saw its biggest monthly increase in February since records by financial information group Moneyfacts began.

The typical SVR interest rate now stands at 4.61%, and it will almost certainly increase further in the coming month as lenders pass on the latest 0.25% interest rate rise. Even before the latest hike, it was a massive 1.96% higher than the average interest rate currently charged on a two-year fixed rate mortgage

To put this in context, the difference would cost a client with a £200,000 mortgage around £327 a month, or just under £4,000 a year in interest payments.

The message to clients is clear: don’t put off remortgaging if your current deal is nearing its end.

Minimal rate shock

Given what’s happening in the mortgage market, clients coming to the end of a fixed rate deal may understandably be worried about rate shock.

The good news is that if they can avoid an interim period on their lender’s SVR, any rate shock should be minimal, particularly for those coming off a five-year fixed rate product.

While the average rate on a five-year fixed rate mortgage is currently at a three-year high, it is still 0.05% lower than it was five years ago.

In other words, if you are about to come off a five-year deal, mortgage pricing is currently pretty similar to where it was when you last remortgaged.

The news is not quite so good for clients coming off a two-year fixed rate deal, the average cost of which is now at a six-and-a-half year high. Even so, typical rates are still only 0.22% higher than two years ago, or around £37 a month for someone with a £200,000 mortgage, so any payment shock should be manageable.

It’s also worth reminding clients, particularly those coming off five-year fixed rate products, that they may well now qualify for a lower LTV tier than when they previously remortgaged, meaning they should also benefit from more competitive pricing.

Act fast

Unsurprisingly, given the state of flux the mortgage market is currently in, individual products are not hanging around for long.

The average product shelf life has dived from 42 days in February to just 28 days now, giving clients only a short period in which to secure their chosen deal.

Meanwhile, Moneyfacts reports that the number of product updates from lenders it is processing has doubled month-on-month.

Things look set to get worse

With further increases to the base rate predicted, the mortgage market looks set to get tighter going forward. The consensus forecast among economists is that the base rate will rise from its current level of 0.75% to end the year at 1.25%, according to a recent poll by Reuters.

With the average cost of two-year and five-year fixed rate deals having risen for five consecutive months, it appears the period of record low mortgage rates is now well and truly over.

Lenders also appear to be tightening their lending criteria. Recent Bank of England figures showed a fall in both net and gross mortgage lending in December, the latest month for which figures are available, despite an increase in mortgage approvals. The data suggests that while lenders are happy to write new business, they have become stricter about the amount individuals can borrow.

Since the period covered by this data, the base rate has not only increased by a further 0.5%, marking the first time the MPC has hiked rates in three consecutive meetings since 1997, but inflation, as measured by the Consumer Prices Index, CPI inflation rose to 6.2% in February, which is a 30-year high.

Meanwhile, the conflict in Ukraine has sent the cost of petrol soaring, while higher energy bills and food prices will put further pressure on consumers’ budgets, as will higher National Insurance rates when they kick in at the beginning of April.

As a result, mortgage providers are likely to tighten their lending criteria further going forward.

Expertise pays

While lenders appear to be retrenching, there are still good deals available. Although clients coming to the end of their product term may feel disheartened by what is happening in the mortgage market, they should not delay remortgaging, as the situation is likely to worsen in the weeks ahead.

Meanwhile, the current complexities and fast pace of the mortgage market all serve to highlight the benefits to clients of taking expert advice.

Get in touch to hear more about how Eligible can help your firm in 2022.

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