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Writer's pictureKnightwoodM

What's Going on with Mortgage Rates?


As we all know interest rates are most definitely on the rise again. With inflation hitting eye watering numbers, the Bank of England has reacted and started to increase their base rate of borrowing from the historic lows we have experienced since the banking crash.


In the past 6 months we have seen 4 increases totalling 0.9%. A quick analysis into the change in interest rates available to mortgage customers over that same period however shows the difference is more like 1.25%-1.5%...... and it's still rising.


So, what's going on?


The cost of the money that banks and building societies use for their mortgages is not directly linked to the base rate so we would not expect changes to be exactly in sync, but a level of correlation would be expected. Currently the increase is around a third higher.


Are lenders taking advantage of the inflation landscape to increase their profit margins or cover their increases costs?


Are banks concerned about where house prices might go in the next few years and are being a little more risk averse?


I don't think there is strong evidence for either of those suppositions.


The UK mortgage market is a very mature one. There are lots of providers and plenty of competition which limits the ability to simply put up prices (rates) and expect to still attract customers. As for being worried about the market, over the last few months lenders have been relaxing the criteria that they had restricted during the pandemic, allowing them to lend more to more. The return to 5x and 5.5x income, improved self employed criteria and competitive BTL lending at 80% are all examples of lender confidence in the market.


The reason for the increase in rates, over and above that which is a result of the base rate changes, could be plain old demand. Just as we have inflation in fuel and food where demand is exceeding supply, the same is happening in mortgages.


The market is very busy at the moment. Clients have told me about turning up to viewings to find queues of perspective buyers, offers above asking prices rejected and an urgency to secure a mortgage rate before further base rate rises. This has led to a surge in applications that most lenders have been unable to adequately cope with. Timescales for underwriting have dramatically increased with one lender taking 4 weeks to look at an application. "Send us your case, we'll look at it in a month". Providers have therefore taken action. In order to reduce their workload and get their processing timescales back under control, they have put up rates- they have become less competitive.


In isolation this would not be a big issue. If a hand full of lenders increase rates, others are there to soak up the applications. The problem is that there is currently a flood and a domino effect of applications falling from one lender to the next is overwhelming capacity and resulting in each provider in turn having to increase their rates.


That's where we are. Rates are on the rise due to increases to the base rate but also due to the current level of demand in the market.


What does it mean for the future?


Well, a lot of that of course depends on how long this period of high demand continues. If the Bank of England continues to raise interest rates to combat inflation then we can expect mortgage rates to follow relatively closely but I hope that as the pressure on lender application volumes tends back towards the norm we should start to see a return to the highly completive, price driven mortgage market that we are used to and this can only be good news for customer's wallets.

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