The Bank of England’s chief economist has said the government’s mini-budget, which led to the pound falling to a record low against the dollar, will require “a significant monetary policy response”.
Kwarteng sent sterling and government bonds into freefall on Friday with a so-called mini-budget that was designed to grow the economy by funding tax cuts with huge increases in government borrowing.
In response, it’s likely that the base rate could reach higher levels than expected in 2023, which has prompted a temporary exodus of lenders from the market in response, while they regroup to assess how to price their products.
Yesterday, approximately 10 lenders got in touch to announce they are withdrawing all fixed rate products completely, however already today we’re seeing these products return at a higher rate.
The exodus is affecting the residential, commercial and buy-to-let sectors but the bridging market in comparison isn’t reacting in quite the same way. Bridging lenders are re-pricing yes, but they aren’t pulling out of the market at this stage.
The key message to borrowers is to keep calm, but act quickly to secure a rate if your mortgage term is coming to an end in the next 6 months.
Peter Williams, CEO said “This is not a case of lenders pulling from the market completely. They are just trying to deal with the challenge of a volatile rate environment which makes it incredibly difficult to calculate how much it will cost to lend money in the face of short-term uncertainty. They have pulled some fixed rates, regrouped and returned to the market today with a higher rate.
No doubt, there will be more that do the same over the coming days. All we can hope for is that lenders give us a little more notice. But, the key message for us as this stage is to not get swept away in the media frenzy, keep calm and carry on advising our clients to the best of ability.”
Why are lenders pulling rates?
Shifting rates, service issues and general instability have been a fixture of the mortgage market for the last 6 months – but why?
It’s no secret that the Bank of England has been flexing its bluntest policy lever, AKA interest rates in an attempt to get a handle on inflation. There have been multiple base rate rises this year, with more action promised by the Bank of England in response to the markets reaction to Liz and Kwasi’s borrowing spree.
This makes the rate at which lenders borrow their money unpredictable, so rates must rise heavily to compensate for future changes.
In order to get an understanding of why rates are moving like they are, you must understand how lenders are funded.
The financial institutions that provide the capital that lenders lend out derive their return based off 2 things;
(1) a fixed margin, to compensate them for the risk they’re taking and;
(2) a risk-free floating rate such as SONIA (Sterling Overnight Index Average).
Expected return = (1) Fixed Margin + (2) Floating Rate.
SONIA and swap rates
The SONIA swap rate is informed by many economic and macroeconomic factors such as BofE base rate, inflation stats and the value of sterling for example.
This means that if many base rate hikes are predicted, the swap rate will factor that price in, before the hikes happen.
These numbers usually increase gradually in a stable market, but during times of market uncertainty, swap rates can increase dramatically – which is what has happened today.
The swap rate depends on how many years the rate is fixed for, with longer term fixes being more resilient and shorter term fixes being at the mercy of a poor short-term outlook.
This is why lenders have pulled their short-term fixed rates.
So what can you do?
The best advice we can give is, act now.
If you have a remortgage due in 6 months you can fix a rate now. Rates are only going to continue to rise, so the best option you have is to speak to an expert who can advise you on the best course of action for your circumstances.
Full time property developers and landlords, the main thing for you to remember is – Don’t panic.
Yes, rates are higher and your margins are smaller. But, there is still profit in your opportunity, and you are still gaining a safe asset that will continue to appreciate in value, even in the event of a minor correction.
To channel the mantra of our late Queen Elizabeth, keep calm and carry on.
Call us on 01489 346788 if you have any concern.