City thinking, local knowledge

What’s happening in the mortgage market?

By Questa Chartered

As you’ll certainly remember, last September’s disastrous Mini Budget led to turmoil on the markets, the pound tanking and mortgage rates shooting upwards.

Amid all the chaos, major mortgage lenders pulled products from the market, and when they were made available again later on, many were more expensive than before.

So where do we stand now, a good few months down the line?

Well, mortgage rates have thankfully headed back down and the market has settled somewhat.

The average rate for a five-year fixed mortgage had peaked at 6.65 per cent last October, according to price comparison site uSwitch, but now stands at around 4.74 per cent. The typical rate for a two-year fixed mortgage, meanwhile, is 5.35 per cent.

But at the same time, we’ve seen interest rates shooting upwards, as the Bank of England seeks to tackle soaring inflation (currently 10.1%).

The Bank’s Monetary Policy Committee raised interest rates from 4 per cent to 4.25 per cent in March – the 11th rate hike since December 2021, when the Bank rate was just 0.1 per cent.

That, in turn, has made borrowing much more expensive – and that’s bad news for those who are approaching the end of their mortgage terms.

According to the Office for National Statistics (ONS), 57 per cent of fixed-rate mortgages that are coming up for renewal in 2023 were fixed at interest rates below two per cent. As a result, it believes more than 1.4 million fixed rate mortgage holders could end up paying significantly more in monthly payments when their deals end this year.

As Myron Jobson, senior personal finance analyst at UK investment platform Interactive Investor, told Bloomberg: “People nearing the end of their fixed-rate deal are in for a nasty shock.”

How are consumers responding?

The Mini Budget shook confidence among both lenders and buyers, and it could be some time before both are back to where they once were.

Evidence of that lies in figures from the ONS, which showed that in January this year, Britain’s mortgage market contracted for the fifth month in a row, with the number of mortgage approvals falling to their lowest level since 2009 (excluding the period following the first Covid lockdown in 2020).

We’re also seeing many of those who are taking out mortgages opt for much longer terms. Whereas a typical mortgage would run for 25 years, movers and first-time buyers alike are apparently seeking to spread their repayments over 40 years.

That means they can pay less each month at a time when house prices remain high and they struggle with rising living costs.

According to figures from UK Finance, the number of first-time buyers taking out a loan over 30 to 35 years went up from 34 per cent to 38 per cent during 2022. Meanwhile, the number choosing a mortgage term longer than 35 years more than doubled throughout the year to 17 per cent.

However, this could still be a costly option in the long run, as Chris Sykes of Private Finance told the Telegraph that those making mortgage repayments over a longer period would end up “paying more interest”.

Estimates from Private Finance suggest that if interest rates stay at 4.5 per cent, a buyer who wants to borrow £450,000 over 40 years would pay back £972,000. By contrast, if they’d opted for a shorter term, they would have paid about £221,000 less in repayments.

It’s notable to observe that the mortgage industry has responded to this change in consumer habits, as figures from Moneyfacts show that the proportion of mortgages with a standard maximum term of up to 40 years has risen from half to two-thirds over the last four years, so we could see much more of this happening in the coming months and years.

It’s interesting to note that amid all the recent volatility and uncertainty, house prices have largely held up, but we should point out that this could be partly due to other long-standing issues that were inflating prices, such as the limited supply of properties coming on to the market. And that in turn will impact on the amount of money that people will need to borrow in order to get a mortgage.

If you’re considering buying a house, taking out a mortgage or remortgaging your property, you might justifiably feel uncertain about decisions to take next.

That’s why it’s so important to get advice from a professional, regulated financial advisor. You can be sure that an experienced specialist will always offer advice with your best interests in mind, so you can move forward with confidence that you’re acting wisely and prudently.

Please get in touch with us if you have any questions.

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