Lenders struggle with costs amid grim inflation forecast
The average two-year fixed mortgage rate has broken the 4% barrier for first time in almost a decade, the latest research by Moneyfacts shows.
Figures released on Monday (August 22) reveal that the rate this month shot past 4% for the first time since February 2013, just weeks after the Bank of England (BoE) decided to increase the base rate to 1.75%.
Data also shows that the average two-year fixed rate has risen by 1.75% since last December, when it stood at 2.34%.
In addition, the overall five-year fixed average has gone up even higher, by 0.16% since the first of this month to 4.24%.
The rise in rates since last December has also led to a reduced shelf-life for mortgage products, which are now down to just 17 days on average, resulting in fewer choices for consumers, with some lenders even halting lending, according to Eleanor Williams, finance expert at Moneyfacts.
She said: “We have seen lenders withdraw parts of, or entire product ranges, with a number citing the pause in lending being due to unprecedented demand.”
She noted that borrowers had “rushed to secure deals before rates have a chance to climb even further”.
She pointed out that the narrowing cost benefit of two-year compared to five-year fixed rates could “incentivise consumers to consider the added security of fixing payments for a longer term”.
This is because the average 10-year fixed rate had “barely changed” since the start of the month, inching up by only 0.01% to reach 4.20%, adding that it was actually 0.04% lower than the current average five-year fixed rate.
She, however, warned that locking in to a decade-long fixed deal “could be a double-edged sword” as mortgage rates were expected to continue rising, adding that further base rate rises “could impact the sector”.
The release of the Moneyfacts figures coincided with a grim forecast by investment bank Citi, predicting that mounting inflation could hit 18% next year due to rising energy prices.
Last month, inflation hit 10.1%, with the BoE predicting that it could reach 13% before the end of the year.
However, Citi said it could go much higher than that, adding that inflation was “entering the stratosphere”.
If it were to reach 18%, it would be the highest inflation rate since 1976.
Citi’s chief UK economist, Benjamin Nabarro, told the BBC that affordability concerns were “growing more deafening by the day”.
He said: “The question now is what policy may do to offset the impact on both inflation and the real economy.”
Mortgage Introducer (MI) reached out to industry experts, asking how rising rates would impact on homeowners and borrowers, while asking how brokers and lenders should respond to the crisis.
Keith Barber, director of business development at the Family Building Society, revealed that soaring rates were also increasing costs for lenders.
“This is a difficult time for advisers and mortgage borrowers. Rates are moving quickly. On the lender’s side of this, since Wednesday, August 3 (the day before the latest rate increase by the Bank of England), the cost to us of the interest rate swap needed to provide a five-year fixed rate mortgage has risen by about 10%. The cost for a two-year fixed rate has increased by about 16%. With cost changes like this, it is no surprise that mortgage products have such a short shelf life,” he said.
“Borrowers need to think about their individual circumstances, both now and their plans for the future, their affordability and their approach to risk. If you place a high value on avoiding risk and want certainty in your monthly mortgage payments for five or 10 years, then the difference in rates becomes secondary.
“If affordability is stretched by a higher rate, then a longer mortgage term may help. With the cost-of-living rising around us, there will be a high focus on getting the lowest possible monthly mortgage payment. Advisers have a key role in making sure the borrower gets the right mortgage and product, not simply what is the cheapest today.”
A spokesman for the Leeds Building Society told MI: “The one thing that financial markets and borrowers both hate is uncertainty. Therefore, it’s no surprise that there is a degree of volatility in the money markets at the moment as worsening economic indicators and a potential cost-of-living crisis casts a cloud over the UK economy.
“Although beginning to show signs of a gradual slow down, the UK housing market continues to be resilient – particularly within the affordable housing segment. We are certainly seeing an increase in demand from brokers and borrowers for longer term fixed rate deals of at least five years. This is normal behaviour at times of economic or political uncertainty as borrowers try to protect themselves from future rising costs.”
Read more: Rate of house price growth “surprising”
Paul Broadhead, head of mortgage and housing policy at the Building Societies Association, said that despite the reduced choice of products for borrowers there were still more than 4,000 on sale, adding that competition remained strong overall for consumers.
He said: “Around 80% of mortgages are in fixed rate products, and with two and five-year terms the most popular for some time, it is no surprise that the remortgage market is highly active right now. This means that tranches of money at particular rates are being used up quickly, hence the short shelf life for many.
“It is understandable that borrowers coming off shorter term fixed rates may contemplate fixing for longer given the current rate and economic uncertainties we face. They would be wise to take mortgage advice to ensure that they make the right decision. The longer the fixed rate period, the longer the certainty of payment, although most fixed rate mortgages carry an early redemption charge so borrowers need to be aware that an early exit from a product taken out today may carry a cost, if rates, or their circumstances were to change before the end of the deal.”
Regarding the pause on lending by some lenders, he said it was temporary in order to manage service levels to brokers and customers.
“This is not a new phenomenon but is used only when the flow of applications cannot be controlled by any other means,” he said. “Keeping service levels high for brokers and consumers is top of mind.”