Mortgage rates may be about to get more expensive despite unprecedented measures from the Bank of England designed to keep them low.
Brokers say a ‘perfect storm’ of issues indicate that mortgage rates, which are currently still at historical lows, may soon rise as the coronavirus lockdown ravages many households’ finances.
At the same time, lenders have become more cautious about who they lend to.
Mortgage rates remain cheap but experts have warned that this may be about to change
A cocktail of uncertainty about the future of house prices, millions facing redundancy and a huge surge in demand from borrowers seeking loans after the recent stamp duty cut has put the brakes on further.
Mortgage broker Private Finance says this may lead to banks pushing up rates to stem the flow of applications.
But is this alone enough to push up the cost of buying a home, and what other factors are involved? We take a look at what determines mortgage rates and whether an imminent rise is likely.
Banks can’t keep up with demand
Banks and building societies cut a staggering number of deals in the opening months of lockdown, mostly blamed on staffing shortages as the majority of the country worked from home and a wave of customers requested mortgage holidays.
In fact, when mortgage holidays were first introduced many borrowers found themselves waiting on the phone for 10 hours or more before being able to talk to somebody.
Lenders will have more of a handle on their staffing issues now, but they are still working at a much lower capacity than they once were and with branches still closed almost everything now needs to be done online or over the phone.
Broker Private Finance’s Chris Sykes
Lower deposit mortgages usually take more work to underwrite, as they present a higher risk to the lender.
As a result, if staffing problems at banks and building societies lead to deals being cut, it’s these ones that go first.
But lenders can also increase rates if they want to dampen demand.
Broker Private Finance’s Chris Sykes said: ‘The stamp duty changes really have spurred on a tsunami of business and lenders and brokers are struggling to deal with the level of demand we are seeing at the moment.
‘Many home buyers have bought forward plans by many years with the prospect of saving themselves up to £15,000 [in stamp duty] being extremely attractive.
‘Employees are still working from home and lenders are feeding back that unlike many industries there is a decrease in efficiency.
‘On top of this valuers in many cases are still on furlough or unable to work due to childcare.’
Sykes said that due to this it is taking an ‘extremely long’ time to process mortgages, adding that lenders are increasing rates to manage the flow of applications as a result.
Lenders cut a staggering number of mortgage deals in the opening months of lockdown
Lenders are more risk averse
Another factor that may push up rates is a dwindling appetite from lenders to take on borrowers who they see as more of a risk.
And if they see lending as more risky in general in an ailing economy, this could mean rates will rise.
This is because banks, counter-intuitive though it may seem, charge borrowers who they see as more likely to default more than those who they see as a safe bet.
This means they can earn more interest to offset the cost of the bad loans that end up defaulting.
So, banks may see a shrinking economy where job losses are likely as a good time to put up mortgage rates to cover their backs if households can’t afford their monthly bills and go into arrears.
It’s worth noting that more than two million home owners are already in this position, having opted to take a mortgage payment holiday – just another way of saying pre-authorised arrears.
Experts claim lenders are more relaxed now than they were during the initial Covid outbreak, during which time they became extremely cautious.
However, measures introduced during lockdown, including harsher credit scorings and an unwillingness to lend to the self-employed, are still in place and likely to remain for some time.
Swap rates have levelled out
Mortgage rates are part of a complex financial web that draws on the Bank of England’s base rate, money market funding costs, and competition for savers’ deposits to determine their pricing.
Traditionally the cost of fixed rate mortgages has been heavily influenced by swap rates, which set the cost of obtaining fixed-term funding on the money markets for lenders.
Swap rates have varied throughout the year but seem to have levelled out for now
Generally, a rise in swap rates will push up mortgage cost for the lender and therefore borrower. A fall in swap rates allows lenders to offer cheaper mortgages.
Though there was a slight rise in swap rates earlier this month, they seem to have now levelled out and remain lower than they were last year.
How have rates moved this month?
Data from financial experts at Moneyfacts seems to support Private Finance’s warning on impending rate rises.
While rates on the low risk five-year 60 per cent loan-to-value deals haven’t moved since the start of the month, some of the riskier deals have crept up.
Both two-year and five-year deals for those with a 20 or 30 per cent deposit have risen, as have two-year fixed rates for those with a 10 per cent deposit.
Five-year fixed rates at 90 per cent loan-to-value have fallen slightly by 0.03 per cent.
Eleanor Williams, finance expert at Moneyfacts, expects rates to rise in the coming months: ‘With reports that bank profits may be falling and providers needing to set more funds aside for further coronavirus planning and potential defaults, this could signal the end of the historic low mortgage rates of recent months.
‘Therefore, those looking to secure a new deal now may wish to move swiftly.
‘The role of an experienced, independent adviser has never been more pivotal in ensuring borrowers are able to make an educated choice about the right product.’
It’s also important when looking at average rates across the board to bear in mind that though they may appear low, many of the more expensive mortgages have been taken off the market in recent months, bringing averages down but also reducing choice for those with smaller deposits.
Over 90 per cent of deals for those with a 10 per cent deposit have been cut, for example.
So be wary of average rates, as unless they are broken down to individual loan-to-value tiers, they may only mostly reflect the cheaper deals that are still available.
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