How to get away with just a mild case of mortgage pain


This is the most positive comment I have heard when speaking with UK mortgage specialists this week. The recent turmoil in the government securities market has made securing real estate finance a big deal.

One of Britain’s biggest lenders, NatWest Plc, actually hiked rates on its most popular mortgages amid new Chancellor of the Exchequer Jeremy Hunt’s maiden speech in the House of Commons on Monday. It doesn’t take much for risk managers to sound the alarm when interest rates rise as sharply as they have over the past two months. Most mortgage offers are binding for up to six months, so it’s understandable that lenders pull the best deals and wait for the dust to settle before proactively re-competing.

Ten-year gilt yields have more than doubled to around 4% since mid-August. Until Hunt scrapped his predecessor’s tax plans, returns were even higher. The interbank swap market, a benchmark for banks’ fixed-rate transaction funding costs, is around 5% for maturities of one to five years.

Most mortgage offers are now over 6% at face value. A year ago, it was possible for a brief window to get a five-year fixed rate as low as 1%, but base rates were only 0.1%. Those days are long gone, probably forever. Now, many deals are deliberately priced unattractively to avoid bargains, so it’s advisable not to read too much about averages or scary media stories for that matter.

But potential buyers rarely ask for an average offer. They want the lowest competitive rate available. And it’s still possible (via a well-known lender like Nationwide Building Society) to get a five-year fixed deal with an 85% loan-to-value ratio at 5.39%, according to Peter Tsouroulla, head of mortgages at Trinity Lifetime. Partners, a financial advisory firm in London. This rate increases to 5.19% for an even longer fixed term of 10 years (based on a 25-year life mortgage).

But things will eventually calm down.

The real trick, if you can handle the heat of higher interest rates a bit more, seems to be opting for a follow-on mortgage. These are linked to the Bank of England base rate (which is expected to reach at least 3% on November 3) with a credit premium of 0.75 to 1.25% on top. NatWest and Barclays Plc both offer two-year trackers at 3% (this will increase based on base rates). All mortgages revert to lenders’ standard variable rates once the fixed or teaser rate term ends. As these are usually significantly higher than the fixed rate offers being promoted, most are immediately refinanced.

In times of stress, like now, it can become nearly impossible to get a loan if there are unusual complications, such as a small down payment, bad credit history, or irregular employment. Likewise, with rental prices set annually often lagging behind the cost of mortgages, the buy-to-let market has become more illiquid as lenders forgo potentially riskier loans to landlords. With tighter regulations on tenant withdrawal, it has become more difficult to quickly secure the underlying collateral. Lenders are notoriously pro-cyclical in their fears, reducing the flow of capital in bad times and generally overdoing it during good times. So it pays to wait if you can bide your time.

Although official interest rates are unlikely to have peaked, sterling money markets have already priced in much higher levels of around 4.5%, and mortgage lenders have taken all of this into account. . In fact, UK rate expectations are above what most economists believe will eventually peak around 4% and should start falling by 2024.

Naturally, mortgage providers value existing customers with a decent track record; So new borrowers and first-time buyers may find it more expensive than homeowners who are paying down their mortgage. But greed will eventually overcome fear again, when volatility decreases in currency markets. Patience is a virtue if you want to get better financing for a roof over your head.

More from Bloomberg Opinion:

• Truss squanders Thatcher’s legacy with the owners: Thérèse Raphaël

• The UK rental market is broken but not beyond repair: Stuart Trow

• Buying a house now wouldn’t be a bad idea: Teresa Ghilarducci

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Previously, he was Chief Market Strategist for Haitong Securities in London.

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