Mortgage Market Update

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08 February 2011

"Don't panic, Captain Mainwaring!"

Already this year, we've seen mortgage headlines and hysteria in the media. Welbeck Group Head of Mortgages Neil Stephens picks his way through the jargon and helps you understand the latest news.

The start of 2011 though was not without incident. We saw some fantastic headlines - fantastic if you are a mortgage broker, that is; not so hot if you are a mortgage holder of a nervous disposition.

Soaring Interest Rates?

My particular favourite this year has been The Evening Standard’s “Soaring Interest Rates on The Way” on 18 January. The article focused on the issue of soaring inflation and how the Bank of England will need to raise its base rate higher and faster the longer inflation is allowed to run.

The response from clients has been to run to the safety of a fixed rate; the response from the Banks has been to raise said fixed rate pricing. There is some justification as mortgage funding costs have risen steadily since the start of the year, though margins for banks are still healthy!

Swap Rates Rise

This rise in Swap Rates (20-30 basis points since January or 20% of absolute cost) has been passed on or is in the pipeline to be passed on. It prompted the MD of one high street lender to remark “Wow, this will have a big impact on pricing.” An obvious comment but also an ominous one: it indicates the mind-set amongst banks is still one of making a quick buck and keeping margins while base rates remain low.

The next big news item was the GDP figure. Apparently a couple of weeks of snow is the reason for a 2% annualised contraction in the economy. To quote Gavyn Davies (Former Head of Global Economics at Goldman Sachs), the figures are just too bad to be true. However, this number helps the Bank of England put off the decision to raise base rates. Hopefully this expectation will be exerting a downward pressure on Swap Rates. The caveat here is that we need to resist pay increases above or even in line with inflation.

Will Base Rates Rise?

However, as with everything in this current economic climate we have seen somewhat of a reversal of opinion. Sentiment has once again moved towards rate rises as economic data point again towards a recovery. There is an unsettled and inconsistent view, however. Recent headlines on the BBC website confirm this:

• 1 in 5 workers fears the sack
• House prices rise 0.8% in January
• World food prices reach new high
• New car sales fall 11.5%
• UK services at 8 month high

Unfortunately we need to make mortgage decisions against this unsettled economic backdrop. When will the Bank of England start to raise the base rate, by how much and how quickly? These are the key questions.

Mortgage lenders have responded to the sudden upsurge in refinance activity by raising rates. The issue they have is similar to the one they faced in 2008 when base rates started falling. The lender with the lowest rate is getting hammered with applications so they pull back the rate. This subsequently leaves the lender with the next lowest rate exposed to the same pressure. Two days in, and that lender realises they are being hammered; and they too pull back the rate. This is the vicious cycle we saw in 2008 and it means that rates rise at a faster pace than the increase in funding. Costs get to a point where refinancing is again unattractive vs. your current Standard Variable Rate (SVR), so you sit tight and make no change.

Lenders will then re-enter the market once they have dealt with the backlog created by the previous surge.

Pace of change in the Rate Market

What does this really mean though? Well, for one thing it means a headache for me. The level of uncertainty currently suggests that I would grab a fixed rate now but delay on drawing down funds. Make an application, get the rate secured and then take a view.

Rates will fluctuate this year. They will be withdrawn with very little notice but lenders may come in with great rates, again at short notice and with a limited tranche of funds to grab good quality business.

Our message - Don’t Panic!

Finally, to refer back to the title and its "Dad's Army" reference: it's right not to panic, but costs will rise this year. The key is the difference between what you are paying and the premium you could pay. "Don't panic, Captain Mainwaring!" refers to the blind panic the press seem to enjoy creating out of a fluctuating situation. Is it really as bad as they make out? Possibly not - and as everyone knows, good news doesn’t sell newspapers.

One thing is for sure, we are in for a mortgage ride this year…anyone coming along?

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Neil Stephens
Head of Mortgages
Welbeck Group