"While obviously more expensive than current fixed term deals, there are many advantages baked into the higher price."
April’s official inflation figure of 8.7% wasn’t what the Bank of England was expecting with their forecast being 8.4% and it wasn’t what the financial markets wanted to hear either, given their immediate response.
Once again, bad news spooked the markets and gilt rates rose, with further base rate rises now expected as the fight to reduce inflation continues.
As swap rates are closely associated with gilts, these have also risen sharply in recent days. At the time of writing, the two year swap rate is 5.112%. Two weeks ago, it was 4.70%. And if this helps to explain the situation to clients, this time last year it was just over 2%.
At a result, many lenders have continued to pull products (with little or notice), increased the rates on their fixed term deals or indeed pulled their longer term fixes altogether.
This situation feels very similar to the chaos caused by the ‘mini budget’ of last September and we don’t have to remind you of the difficulty that caused in placing deals for your clients and the added workload and stress for mortgage brokers.
Inflation, interest rates and client expectation
There are several themes at play in the mortgage market at the moment, without much clarity about how these will play out. It is this uncertainty and the interdependencies of all involved in property finance that is creating such volatitly. Markets don’t like uncertainty, which drives up gilt rates, which directly influences swap rates (which determines pricing on fixed terms – which 97% of borrowers opt for), which prompts lenders to pull products and price upwards, which makes a mortgage broker's job hell! And that’s without factoring in client expectations of what they believe is achievable.
Theme 1 is while inflation has started to fall, it isn’t falling as predicted and so the blunt sword of base rate rises by the BoE will continue. Many economists have now re-forecasted the peak of base rate at 5.5% and the descent, when it starts, will be more gradual. By the end of 2024, analysts think base rate to be around 3.75%. Market pricing suggests that interest rates will still be over 5% in a year’s time, and over 3.5% in five years.
Theme 2 leads on from inflation and that is the direction of interest rates. When will they fall, and by how much? Will they ever return to pre pandemic levels? What is the ‘new normal’ going to be? If inflation ever returns to the 2% target, analysts expect the ‘new normal’ of base rate to be around 2.5%. The impact on fixed term deals? 3.5%?
Theme 3 is client expectation versus reality. For those in their mid-30s, the backdrop to their adult lives has been near-zero interest rates until the BoE latest hiking cycle began in early 2022. It is this age group that are likely to have the most unrealistic expectations, given that for older clients, interest rates averaged 6.2% between 1975 and 2023.
Regardless, all households with fixed-rate deals expiring this year will be in ‘rate shock’ as they face an average increase of £2,300 to their mortgage bill.
Fixed terms are not the only dish
Given the chaos in the kitchen, how do mortgage brokers deliver the best service front of house and serve their clients the best mortgage solution - when the dish they want is no longer on the menu?
One of the increasingly popular options is simply to explore the alternatives and take a different path. The journey is ultimately the same, to secure the best outcome for your clients, but in the shorter term the route taken is different.
The alternative I’m referring to is bridging finance, a sector of specialist finance that has matured and progressed beyond belief in the last few years. So much so that bridging is now a credible and cost effective alternative for many clients whose fixed term deals are ending this year.
At Crystal Specialist Finance, we’re seeing a surge in demand, with enquiries for bridging typically accounting for a third of our weekly business.
The reasons for this are simple to understand given that bridging ticks so many boxes for borrowers.
Firstly, they offer competitive and stable pricing. I emphasise stable because of the way bridging is funded, enabling lenders to ignore the macerations of the wider financial markets. At the time of writing, the best bridging deals are offering rates from 0.55% per month with a 2% product fee.
While obviously more expensive than current fixed term deals, there are many advantages baked into the higher price. Bridging deals can be repaid at any time, without penalty, at a time that suits your clients. There are no hefty ERCs to consider. If fixed term deals were to fall sharply in price, clients are free to respond.
The focus of bridging lenders is the value of the property not whether clients have a less than perfect credit record or have ‘non-standard’ incomes from being self-employed, contractors, etc.
Plus, bridging finance opens up opportunities that high street lenders simply won’t entertain – such as helping adventurous clients buy a ‘doer upper’ or an uninhabitable property at auction or indeed break a chain allowing clients to secure their dream home.
And lastly there is the speed of completion that bridging finance is renowned for. At Crystal, our record stands at eight hours!
As we move into the second half of 2023, it’s clear that the calmer waters we thought lied ahead just a few months ago, are now further along the horizon. As an industry, we have to continue to move forward and face our challenges head on. These may be the same – to find the best outcomes for our clients – but the way we achieve them doesn’t have to be.
