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How will the rising Bank of England rate impact the UK property market?

James Quinn, founder of GB Home Surveys, looks at the measures the Bank of England has taken to tame inflation and its effect on the property market.

It is undeniable that the last 12 months have been incredibly difficult for families and businesses across the UK. From soaring energy food prices brought by the ongoing conflict in Ukraine, to the aftereffects of the UK’s departure from the European Union, not to mention former Prime Minister Liz Truss’ disastrous mini-budget, many recent events have spawned significant volatility in the national economy.

This instability has, in turn, caused inflation to shoot up considerably, and it currently stands at approximately 10%. As such, on Thursday 2nd February, the Bank of England announced that it was raising its interest rate by 0.5 percentage points to reach 4%, explaining that this was the best solution for bringing inflation back under control.

While the increase will likely be welcomed by savers, who will experience a healthy boost to their bank balance as a result, it means others will face higher borrowing costs, making an already challenging financial situation even harder for many people.

With economists forecasting that rates will increase further in 2023 – with a potential rise set to be made on 23rd March – it is understandable why many are concerned about the potential impact that high-interest rates will have on the UK’s property market. So far, however, the market has proven itself to be far more buoyant than many had expected it to be.

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Confidence and competition

When the BOE was forced to hike interest rates to 3.5% in the latter stages of 2022, this naturally fed through to mortgage rates as well, making it considerably harder for first-time buyers to secure the funds needed to purchase a home. While the situation was already gloomy for borrowers at this point, Liz Truss’ now infamous mini-budget made things even worse, ramping the level of volatility up to unexpected new heights.

In the wake of the mini-budget, mortgage providers pulled nearly 1,000 products from sale, leading to a significant rise in the cost of a mortgage. Despite this, in the early stages of 2023, it appears that inflation may now have peaked, which is helping to build confidence in the financial markets.

This is highly encouraging for the mortgage market. Confidence means lenders are willing to lend, and borrowers have access to the products that they need as a result. Considering the hole that the mini budget left in lenders’ mortgage books, it is surprisingly positive that lenders are now lending on fixed-rate mortgages below the BoE base rate for the first time in a long time. With more and more lenders starting to do this all the time, a healthy level of competition has resumed in the market, which is advantageous for borrowers who have a wide range of products to choose from.

Property prices remain high

In addition to the signs of positive activity for the benefit of prospective buyers, high-interest rates are also proving advantageous to many homeowners.

The UK property market has long been marked by supply and demand issues, with the number of people looking to get on or move up the housing ladder far outstripping the number of homes available.

This has already kept property prices high and, as of November 2022, the average house price in the UK stands at £294,910, which is a 10.3% rise from the previous year. With interest rates now having risen to 4% as well, it is unlikely that there will be a significant drop in house prices or value any time soon – particularly with experts predicting a lower peak in the BOE rate at 4.5%.

While average house prices have come down a little, they have not fallen as far as many had first anticipated they would. In fact, in some parts of the country, such as the East Midlands and the North West, prices have actually risen slightly. With supply and demand issues persisting – given that the UK is not building homes quickly enough – and interest rates proving better than expected, house prices may not actually decrease by as much as some are predicting.

Read about the UK Housing Market via our Specialist Residential & Buy to Let Division.

Things are looking up

While inflation remains high, the BOE is anticipating that it will fall over the course of 2023, as wholesale energy prices continue to drop. As such, the rate of inflation is not likely to reach the level that many had feared it would. This is not only positive news for businesses and households who have been hit by hefty bills and day-to-day expenses in recent months, but also for the stability of the UK’s property market.

Given the renewed confidence in the financial markets, the healthy level of competition in the mortgage market, and the fact that house prices remain steady across the country, the outlook for the property market is fundamentally positive despite rising interest rates, which is itself a positive signal for the UK’s economy as a whole.


Source: Property Reporter

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Housing market settles to pre-pandemic levels

Nicky Stevenson, MD of Fine & Country, looks at how stability has returned to the housing market and highlights that the start of 2023 has proved more stable economically than many anticipated.

The latest GfK tracker increased seven points in February to -38, its largest monthly uptick in nearly two years, with all five measures relating to the wider economy and personal finances up in comparison to January.

According to Stevenson: “This is supported by the latest economic index which indicates there was a return to private sector growth in February, with business activity at an eight-month high and manufacturing output at a nine-month high.”

Although the Bank of England reports that approvals in January fell to their lowest level since May 2020, it is clear the housing market continues to transact.

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Stevenson says: “According to the Dataloft Opinion Poll, seven in ten agents are sensing there are more cash purchasers in the market. HMRC have reported that sales volumes in January are on par with the pre-pandemic January average, and Zoopla reported that while buyer demand is 51% lower than the same time a year ago, it is still 8% ahead of the pre-pandemic average of the years 2017 to 2019.

“For those requiring a mortgage, the market continues to stabilise, with product choices increasing. Moneyfacts report that there are more than 4,300 different deals now available, the first time since August 2022 that product choice has surpassed 4,000, presenting plenty of opportunities for buyers.”

After two years of limited new supply to the market, there are signs of more balance as supply returns to normal levels.

Stevenson comments: “Zoopla report a 60% increase in stock year on year, creating choice and giving prospective home buyers options and more room to negotiate on price. Rightmove revealed that average new seller asking prices rose by just £14 between January and February, the smallest ever increase between the months, indicating that sellers may be being realistic on pricing and listening to their agent’s advice.”

She adds: “There may be a pause in demand if anticipated falls in mortgage rates encourage buyers to hold off and hedge their bets. Indeed, Nationwide reported the first annual fall in sales prices for the first time in nearly three years, falling 1.1% in February 2023.”

Looking specifically at the prime market, Stevenson says that annual price growth is currently outpacing the wider market, where month-on-month prices are showing signs of moderating.

Read about the UK Housing Market via our Specialist Residential & Buy to Let Division.

She concludes: “In England and Wales the average price of a prime market property has risen 9.8% year-on-year. London has seen the strongest growth at 11.4%, closely followed by the South West at 11.2%, and the East of England at 10.2%. Wealthier buyers are largely shielded from the higher mortgage rates which have impacted the wider market and the value of the pound remains attractive for international buyers. New instructions for homes priced at £5 million were 74% higher in the last quarter of 2022 compared with their pre-pandemic average.”

Source: Property Reporter

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Bank of England boss signals interest rates may have peaked

The Bank of England governor, Andrew Bailey, has signalled interest rates may have peaked after 10 successive increases in the official cost of borrowing since December 2021.

Speaking in London, Bailey said Threadneedle Street would assess the impact of tighter policy on the economy before sanctioning any fresh moves.

However, the governor also warned that the Bank was alert to the risk of repeating the mistakes of the 1970s and would not hesitate to raise rates further from their current 4% should inflationary pressures become embedded.

Bailey voted for a quarter-point increase in interest rates at the last meeting of the Bank’s nine-strong monetary policy committee in February but made clear on Wednesday that he was now adopting a wait-and-see approach.

“At this stage, I would caution against suggesting either that we are done with increasing Bank rate, or that we will inevitably need to do more,” he said. “Some further increase in Bank rate may turn out to be appropriate but nothing is decided. The incoming data will add to the overall picture of the economy and the outlook for inflation, and that will inform our policy decisions.”

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Financial markets have been pencilling in further increases in interest rates later this year, but analysts said Bailey’s speech pushed back against this idea.

Samuel Tombs from Pantheon Macro said: “It is clear from Mr Bailey’s speech that committee is placing more emphasis on the substantial tightening already delivered and would like to call time on its hiking cycle as soon as it feasibly can. It makes little sense at present, therefore, to price-in a terminal rate at 4.5% or higher.”

Krishna Guha from Evercore said Bailey had “become the first central bank chief to push back against the hawkish global repricing of rates in recent weeks that pushed the market discounted peak UK bank rate close to 5%”.

Bailey said the Bank’s outreach programmes with the public had brought home to him the impact high inflation was having on people’s lives. Although it has fallen back slightly from its peak of 11.1% late last year, the government’s preferred measure of the cost of living still shows inflation running at 10.1%.

“People should not have to worry about inflation in this way,” the governor said.

Bailey added that the UK had been hit by a series of “significant economic shocks” – including Brexit, Covid and the rise in global energy prices linked to Russia’s invasion of Ukraine – and there was “no easy way out”.

People on lower incomes were struggling to make ends meet and the Bank needed to ensure that the situation did not get worse through allowing “homemade inflation” to take hold.

Read about the UK Housing Market via our Specialist Residential & Buy to Let Division.

“I am afraid monetary policy cannot make the shock to our national real income go away. But what monetary policy can – and must – do is to make sure that the inflation that has come to us from abroad does not become lasting inflation generated at home. Homemade inflation will not make us any better off as a country. Those with weak bargaining power will fall further behind.”

Bailey said failing to raise interest rates now may necessitate tougher action later. “The experience of the 1970s taught us that important lesson. But equally … we have to monitor carefully how the tightening we have already done is working its way through the economy to the prices faced by consumers.

“Our outreach events make clear that we need to calibrate monetary policy with great care to return inflation to target sustainably.”

Bailey said the shortage of available workers across much of the UK economy would be a key factor in future decisions by its ratesetters.

“The UK labour market remains very tight. Since the start of the Covid pandemic, we have seen a large increase in the number of people who do not take part in the labour market in this country. The UK labour force has shrunk.”

By Larry Elliott

Source: The Guardian

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There is still appetite for lending in the housing market, says top property lawyer

Without a doubt, 2022 was a turbulent year for the UK housing market. House prices may have hit record levels, but the Bank of England created havoc. By December, the base rate had been increased nine times over the previous 12 months, depressing market activity and putting the brakes on property prices.

According to optimists, there will not be a price crash but a soft landing thanks to a 25% fall in mortgage rates over the course of this year. They argue that forbearance measures from big lenders will help struggling borrowers as they switch to interest-only or competitive fixed-rate deals without the need for affordability tests. Since nearly two million people will need to re-mortgage as their fixed-rate deals expire in 2023, this will cushion the blow and reduce the volume of distressed/repossession sales.

Inflationary pressures and a fiscal squeeze have made mortgages unaffordable for many people relative to their incomes. Average UK house prices are now eight-times average earnings, according to Schroders. In London, the ratio rises to 11 times. Nevertheless, the economic mood is gradually moving away from ubiquitous gloom. For example, as the leading indicator of where corporate earnings are headed, UK equity markets have been back on an upward trajectory since November 2022.

A notable shift in sentiment can also be seen in reduced rates for two-year and five-year fixed mortgages: after spiking at 6.5% last October, they have now fallen back towards the 4.5% mark. For potential buyers, interest rates matter because they affect both affordability and lenders’ willingness to lend.

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Several commercial retail lenders such as Santander, Barclays, Nationwide, and Halifax have recently announced mortgage rate reductions to an average of around 4.5%.

When big commercial lenders cut rates, the market becomes more attractive and more affordable for domestic buyers, particularly first-time buyers – and not just to overseas or domestic cash buyers as happened when rates recently spiked. Notwithstanding the media hype about banks planning to reduce their mortgage lending, they still have plenty of appetite to lend.

The market has now fully digested everything that happened during the past year, including the “new normal” level of interest rates. These increases are now priced into people’s thinking, enabling industry professionals to advise with renewed confidence about where rates might be heading.

Read about the UK Housing Market via our Specialist Residential & Buy to Let Division.

History shows that whenever the UK property market is reportedly down, it does not stay down for long. Good properties are not always available: in busier markets, people often lose out because of increased competition, so buyers with available funding should press ahead on properties they really want.

But there is a caveat: incomes will need to rise in real terms in order to increase domestic buyers’ purchasing power. Without that boost, the market may still be more attractive and affordable to overseas and cash buyers.

By Goli-Michelle Banan

Source: Today’s Conveyancer

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How interest rate rise will affect property market and mortgages

The Bank of England’s decision to hike interest rates to a 15-year high is set to see mortgage payments rise for millions of homeowners.

On Thursday, the Bank confirmed UK rates will rise for the tenth time in a row, to 4 per cent from 3.5, in a bid to control inflation after it reached a record 11.1 per cent in October.

The Bank has faced a tough call over what approach to take, as higher mortgage costs saw the housing market suffer five successive months of falls in property prices.

The IMF reported this week the UK would be the only G7 member to see their economy go backwards this year, with a likely 0.6 per cent contraction. While this would usually lead to calls for interest rates to be cut, the current inflation rate of just over 10 per cent is pushing the Bank to act on its mandate to bring it back towards its 2 per cent target.

Below we look at how the latest interest rate increase could impact the housing market for buyers and borrowers alike.

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After big increases in 2022, the price of the average property in January was £258,297 – down 0.6 per cent on December, and well below the £281,000 figure from last year.

House prices stalled in September, followed by monthly falls of 1.0 per cent in October, 1.2 per cent in November and 0.3 per cent in December.

Further falls are likely now the Bank of England has approved an interest rate rise for the tenth time in a row, as it will likely push mortgage rates up further.

Higher mortgage rates tend to push house prices down as people are less willing to borrow money.

On Thursday, high street lender Santander warned house prices are set to tumble back to 2021 levels, and has set aside more cash for loan losses as it braces itself for a possible rise in the number of borrowers falling behind with repayments.

The Spanish-owned group is forecasting a 10 per cent fall in house prices this year as interest rate hikes dampen demand.


Mortgage rates offered by lenders jumped following the mini-Budget last year and borrowing costs have also been increasing as the Bank of England base rate has risen.

This has resulted in a plunge in the number of mortgages being approved. The Bank reported on Tuesday that 35,000 were given the green light in December compared to 46,000 in November, the UK’s lowest since 2009.

UK Finance estimates that some 715,000 borrowers on tracker mortgages will feel the pinch as interest rates rise again. It estimates householders will be paying around £588 more a year on average as a result of the Bank’s announcement.

In addition, the Office for National Statistics has predicted more than 1.4 million households are facing the prospect of interest rate rises when they renew their fixed-rate mortgages this year.

A string of base rate hikes have taken place over the past year, but borrowers on fixed-rate mortgages were cushioned from their immediate impact. Analysts have said some may get a shock when they come to renew.

Labour has said homeowners could face mortgage hikes of up to £14,000 a year as they come off low fixed-rate deals, adding to the squeeze on living standards.

Analysis by the party shows predicted annual increases in costs for a median house purchase at 80 per cent mortgage in every constituency in the UK.

Read about the UK Housing Market via our Specialist Residential & Buy to Let Division.


Downing Street acknowledged the interest rate hike could be “difficult” for mortgage holders.

The Prime Minister’s official spokesman said: “Inflation is the biggest threat to living standards in a generation, so we support the Bank’s action today to help us succeed in halving inflation this year.

“We will continue to take the difficult decisions needed to do everything we can to reduce inflation, including not funding additional spending or tax cuts through borrowing, which only serve to fuel inflation further and prolong the pain for everyone.”

The spokesman added: “This is a difficult time for mortgage holders in the UK. As the Chancellor has said, sound money and a stable economy are the best way to deliver lower mortgage rates and keep down the costs of mortgage payments.

“That’s why we are taking the necessary and responsible action to halve inflation, reduce our debt and get the economy growing.”


Robert Gardner, Nationwide’s chief economist, said: “There are some encouraging signs that mortgage rates are normalising, but it is too early to tell whether activity in the housing market has started to recover.

“The fall in house purchase approvals in December reported by the Bank of England largely reflects the sharp decline in mortgage applications following the mini-Budget.

“It will be hard for the market to regain much momentum in the near term as economic headwinds are set to remain strong, with real earnings likely to fall further and the labour market widely projected to weaken as the economy shrinks.”

Jeremy Leaf, a north London estate agent, added: “The fizz has certainly left the market, leaving behind more serious needs-driven as opposed to discretionary buyers, coming to terms with more stable mortgage rates and greater balance between supply and demand.

“Looking forward, the outlook for house prices remains fairly steady with no expectation of any dramatic change.”

By William Mata

Source: Independent

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Base rate rises by highest level for 33 years

The Bank of England’s Monetary Policy Committee (MPC) has increased the base rate to three per cent.
The 0.75 per cent jump from its level of 2.25 per cent marked the largest increase since 1989. This is also the highest the base rate has been since November 2008, when it was also three per cent.

The latest rise signifies the eighth consecutive increase to the base rate as the central bank works to tackle climbing inflation.

The base rate increased on a vote of 7-2, with one member – Swati Dhingra – voting for a softer rise of 0.5 per cent which would have taken the rate to 2.75 per cent.

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Dhingra said a “gradated approach” to monetary policy was warranted to avoid overtightening as the impact of the cost of living crisis was already taking hold of the economy. She argued that a smaller rate increase would protect the economy from a “longer and deeper recession”.

Another member – Silvana Tenreyro – voted for an even lighter touch of a 0.25 per cent increase, which would have put the base rate at 2.50 per cent.

Tenreyro said monetary policy had already been restrictive regarding the fall in real incomes and the economy was already possibly in a recession. She also said previous monetary tightening was yet to feed through to the economy,

Ultimately, it was agreed that a larger increase in the base rate now would bring inflation back to its two per cent target sustainably in the medium term, and reduce the risks of extended and costly tightening later.

The MPC also said if there were more inflationary pressures, they would “respond forcefully” if needed.

Read about the UK Housing Market via our Specialist Residential & Buy to Let Division

The economic backdrop
The MPC said in the days leading up to the November decision, the UK financial markets had stabilised. However, it noted that other major economies such as Europe and the United States had tightened monetary policy since the September meeting, despite sharper falls in risky asset prices occuring in the UK.

The committee said in the week before the meeting market expectations predicted the base rate would peak at 5.25 per cent in Q3 next year, but in the immediate run-up to the meeting, it was implied that this would hit 4.75 per cent by the second half of next year.

Since its last meeting in September, monthly GDP was estimated to have fallen by 0.3 per cent in August and other market indicators such as retail sales and consumer confidence had declined.

The MPC’s projections for the UK economy were described as “very challenging” as it expects a recession to be prolonged and inflation to remain above 10 per cent in the near term, then fall sharply by mid-2023.

By Shekina Tuahene

Source: Mortgage Solutions

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Bank of England to suspend market operations for State funeral

The BoE said CHAPS will be closed on 19th September, in line with its normal bank holiday arrangements.

CHAPS handled around 174,000 payments each day, in the year to February 2021, with an average payment value of £2.1m. That works out at around £367bn each working day.

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CHAPS is used by banks and large corporations to settle high-value money market and foreign exchange transactions, by companies to pay taxes, and by solicitors and conveyancers to settle property transactions.

The Bank’s Real Time Gross Settlement (RTGS) service, which underpins large transfers between bank accounts, will also be closed.

Read about the UK Housing Market via our Specialist Residential & Buy to Let Division

Back in 2014, RTGS collapsed for most of a day, putting thousands of housing market transactions on hold.

Last week the BoE said the sale of corporate bonds held by the Asset Purchase Facility will be delayed by a week, to 26 September, following its decision to delay its next interest rate decision by a week (to 22nd September).

Source: London Loves Business

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What the BoE’s 1.75% interest rate means for contractor homeowners

The Bank of England (BoE) last week increased its base rate to 1.75% from 1.25%. This was the sixth consecutive rise in interest rates, taking it to the highest level since the credit crunch in 2008.

But as many temporary professionals are asking us, writes John Yerou, chief executive of Freelancer Financials, what does this significant leap mean for borrowers who are contractors?

Up, up and away
Struggles facing the economy have led to a prediction of 13% inflation by the end of 2022. Economists reckon it could potentially reach 15% in 2023. These figures are far cries from the BoE’s target inflation rate of 2%.

These predictions, against a background of soaring energy bills and spiralling food prices, have forced the BoE’s hand.

Over the last three quarters, the bank’s Monetary Policy Committee has steadily nudged up interest rates from its historic low of 0.1%. This week’s 0.5% increase, however, represents a more forceful move as the BoE grapples to contain inflation.

Additional rate rises by the bank look certain, driven by:

  • the worst credit squeeze on consumer spending in years,
  • severe labour shortages, and
  • spiralling high food, energy, and fuel price hikes.

With the ever-growing economic challenges facing the economy, the question isn’t if increases are coming, rather — it’s when, and by how much.

Will interest rate hikes curb inflation?
This latest interest rate rise to 1.75% is another blow to economic confidence. It places yet more financial strain on recovery as everyone continues to grapple with rising costs.

The reality is that it all makes the impending recession a self-fulfilling prophecy. How so?

Well, the governor of the Bank of England, Andrew Bailey, has been facing mounting pressure to keep up with the pace of global central banks. Both the European Central Bank and the US Federal Reserve have implemented rate increases of 0.5% and 0.75% respectively. This, in turn, has forced the Bank of England to act similarly to try and rein in rising inflation.

But we now question whether raising interest rates is the best way forward under the current conditions.

The textbook approach (isn’t going to cut it)
Any decent textbook on the topics of economics and finance will tell you that, yes, increased rates are the primary tool for reducing inflation. It reduces demand and helps to bring inflation under control.

And this is exactly what the BoE is doing; it’s textbook. By increasing the cost of borrowing, it’s trying to discourage spending. This theoretically leads to lower economic growth and lower inflation.

But will increased interest rates curb inflation in the traditional manner? In our humble opinion, unfortunately, no. That’s because the challenges we face are, to a great extent, unprecedented.

The catalyst for soaring food, energy, and fuels prices is the exceptional melting pot of global factors we face today:

  • successive covid lockdowns,
  • supply chains crippled (some fatally so)
  • the war in Ukraine, and,
  • worldwide labour / skills shortages.

This mix does not represent the usual backdrop for recession!

Contact us today to speak with a specialist Commercial Finance Broker to discuss how we can assist you.

Should contractors be panicking yet?
The 0.5% base rate rise and spiralling inflation headlines will leave many homeowners deeply anxious. And while it represents the largest individual hike in nearly 30 years, it wasn’t actually a surprise.

Those contractors old enough to remember the 80s and 90s may view today’s jump as no reason to panic (just yet).

But for the group of homeowners who’ve only ever known a sub-1% base rate since purchasing their home, it will certainly set off alarm bells.

It’s worth reiterating here that rates are low compared to historic levels. But the rise will affect monthly repayments and individuals’ abilities to borrow. So let’s look at the different scenarios.

What does this 27-year high in interest rates mean for UK borrowers and homeowners?
In the short term, the increase will undoubtedly spur another round of mortgage rate increases from ALL major high street lenders, including contractor-friendly lenders.

Interest rates are already 2% higher than they were at the start of the year, despite the base rate only moving up 1.25% over the same period.

Homeowners on tracker rate mortgages or their lender’s standard variable rate will see their repayments increase. Predictably, this group (some 21% of UK mortgagees), will be the first and hardest hit.

Mortgage borrowers on fixed rates will be protected from the immediate effects of the rate rise. But if you’re a contractor on fixed-term deal which expires in the next 12 months, you will need to be prepared. When you come to remortgage, you’ll see a sharp rise in the interest rates available.

What a mortgage broker can do for you in these uncertain times
Over the past few months, our mortgage brokers have played key roles in helping contractors and self-employed clients ‘lock-in’ competitive interest rates for the future. But the landscape on which they’re doing battle is changing.

We’re already seeing lenders tightening underwriting criteria for first-time borrowers, home-movers and further borrowing.

Applications are taking far longer to process because of increased ‘due diligence’ (whether that due diligence is necessary or not). And affordability calculators are changing every week, shrinking the window of opportunity even for borrowers who may have previously considered themselves well-heeled. These dynamics are making it tougher and more challenging to place mortgage applications.

Our brokers are having to demonstrate incremental creativity and tenacity to pair and select the most suitable lenders. Even so, we retain our ethos of matching clients to lenders whose products and services meet their specific needs. This ensures the underwriting teams we deal with take a common-sense view of the bigger picture — as far as affordability checks go.

Read about the UK Housing Market via our Specialist Residential & Buy to Let Division

The current backlog at lenders: sorry, lenders but you’re not helping yourselves!
Another problem mortgage brokers face when base rates increase is that lenders almost immediately start withdrawing their current products.

Moneyfacts has recently reported that the average shelf-life of any single mortgage product is 17 weeks. That represents the shortest shelf-life on record. This lack of notice creates mayhem for mortgage applications in the pipeline that haven’t been secured.

Many of our clients have seen this coming, however. In recent weeks and months, our brokers have been receiving calls from clients with over 12 months remaining on their fixed term. They’ve been demanding urgent reviews in order to lock in a competitive fix rate; so concerned are they that interest rates are spiralling out of control.

If you’ve not acted yet, it’s not too late. No matter how difficult market conditions become, there are always options available through the right channels. We can help people achieve their homeownership dreams, irrespective of how they are employed. Yet contractors please note, the earlier you engage a mortgage broker’s service, the greater the options and support you will receive.

Moving forward, flexibility from lenders is going to become increasingly important. In the current climate, using rigid tick-box practices for underwriting will fail to serve the needs of many self-employed property buyers. Our goal is to ensure that, even for those most complex of income structures, we find wiggle room — with at least one lender!

Housing market
Over the last couple of years, we have seen extraordinary demand for property purchases. Low interest rates that have made getting a mortgage a lot easier have supported this trend.

But last week’s 0.5% interest rate jump will slow house price growth. Potential homebuyers will become more hesitant over fears of rising interest rates and inflation. However, we don’t foresee a crush or drop in housing prices as we did after 2008, just a cooling-off period. This isn’t a bad thing!

We will see a power shift though. Up until recently, all the negotiating power has been with the sellers. This might start shifting to buyers in the coming months as dwindling interest forces property owners to sell at more reasonable prices.

Behind the headlines…
It was inevitable that mortgage interest rates would increase eventually. They were never going to remain abnormally low forever.

In the short-term lenders will tighten their affordability calculators and underwriting criteria until the dust settles.

And although most lenders have accommodated specialist income such as that of limited company or umbrella contractors in more recent times, independent professionals may find more barriers than their permie peers in the interim.

Nonetheless, our belief is that the fundamentals of the economy are fine. So ignore the scaremongering from some quarters.

Keep in mind, the circumstances affecting today’s surging inflation and cost of living have been brought on by Covid lockdowns creating temporary labour shortages and production issues. The current supply cannot meet the demand – it really is as simple as that. The invasion of Ukraine has also exerted a serious impact on inflation, affecting energy and fuel prices. While serious, none of these aren’t permanent fixtures.

We should also recognise that lenders increasing interest rates isn’t always a response to a change in the cost of funds alone. Sometimes, like now, it’s a response that will help them manage their service levels.

Time after time this has occurred in the past, notably when banks are struggling to cope with the volume of applications. They push up rates to make them less attractive to borrowers. They’ll then reduce rates once they can resume service levels!

Many banks are still understaffed and struggling to cope with application volumes. Swathes of their staff still work remotely, another factor making applications take nearly twice as long as before covid.

What contractor mortgage-holders should do next
One of the key ways to determine where lenders’ interest rates will go (next) is to look at SWAP rates.

SWAP rates are what lenders pay to financial institutions in order to acquire fixed funding for a specific duration. This could be anywhere between one to 10 years.

The cost of this SWAP rate will then be used to price up mortgage products for lenders to secure a profit margin. At the time of writing, current three, five and ten-year money funding is all lower than two-year funding rates, which implies that rates will peak — but start to come back down again.

As a contractor with a mortgage, what your next move is will depend on your current home loan small print and its associated fixed term. We’ve outlined different scenarios for remortgaging on our blog for you to consider. Alternatively, ask us about your current situation and our brokers will outline the avenues open to you. But do ask, and at the risk of repeating myself — act.

By John Yerou

Source: Contractor UK

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Scrapping the mortgage market affordability test ‘is not as reckless as it may sound’

The Bank of England (BoE) announced yesterday that its Financial Policy Committee (FPC) will withdraw the so-called mortgage market affordability test, designed to avoid another 2007-style credit crunch.

Introduced in 2014, the test specifies a stress interest rate for lenders when assessing prospective borrowers’ ability to repay a mortgage.

“Following its latest review of the mortgage market, the Financial Policy Committee has confirmed that it will withdraw its affordability test Recommendation,” the BoE said in a statement.

The move means that lenders will no longer have to check whether homeowners could afford mortgage payments at higher interest rates.

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The decision to withdraw the affordability test comes despite the Bank of England having raised interest rates for a fifth time in a row to 1.25% last week as part of efforts to tackle soaring inflation, meaning some mortgage borrowers could be in line for higher repayments.

The Bank of England, which originally consulted on the changes in February, confirmed that it would scrap the affordability test after determining that other rules, including those that cap mortgages based on the income of borrowers, were “likely to play a stronger role” in guarding against an increase in household debt.

Some experts yesterday described the rule changes as “baffling” in light of rising interest rates. But Mark Harris, chief executive of mortgage broker SPF Private Clients, believes the move could prove sensible.

He said: “Scrapping of the affordability test is not as reckless as it may sound.

“The loan-to-income framework remains so there will still be some restrictions in place; it is not turning into a free-for-all on the lending front. Lenders will also still use some form of testing but to their own choosing according to their risk appetite.

“It could have a positive affect on certain borrowers who have been disadvantaged when it comes to getting on the property ladder. For example, first-time buyers who have been affording rents far in excess of actual mortgage payments but have failed affordability assessments regardless.

“The rate environment and expectations have changed significantly since the rules were introduced when borrowers were tested to ensure that mortgage repayments could be met should rates be in the region of 6% to 7%.”

Read about the UK Housing Market via our Specialist Residential & Buy to Let Division

Lawrence Bowles, director of research at Savills, believes that from a market perspective, removing the current stress testing “could mitigate some of the impact of higher interest rates”.

He commented: “In theory, at least, it should open up a little more capacity for house price growth than is currently looking fairly constrained in the mainstream housing market.

“This said, a fairly high proportion of recent buyers have worked around the “standard variable rate plus 3%” stress test by locking into five-year fixed rates, meaning it will only preserve or open up additional borrowing capacity for part of the market. Lenders will still stress test applicants to reflect where they expect interest rates to be five years from the start of the loan, following the Mortgage Conduct of Business rules.

“Improved capacity for growth would also be dependent on how far lenders are prepared to push loan to income multiples under responsibly lending rules and caps on what they can lend at high loan to income ratios. It is unlikely to open up the mortgage-credit floodgates.

“It should allow lenders to be slightly more flexible which will come as welcome relief to some would-be-buyers struggling to keep up with current criteria because of significant price growth of the past two years – but saving for a deposit will remain the most significant barrier to home ownership.”

By Marc Da Silva

Source: Property Industry Eye

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Property industry reacts to fifth consecutive interest rate increase

Interest rates have gone up again for the fifth time in just a matter of months.

Mortgage holders, house hunters and savers will be affected by the Bank of England’s decision to increase the rate from 1% to 1.25%.

Homeowners on Standard Variable Rates or tracker mortgages will be hit the hardest in the short-term by the latest interest rate increase.

Industry reaction:

Grianne Gilmore, head of research at Zoopla, said: “This rise in rates will translate into higher mortgage costs for those looking to buy a home. For buyers with a 30% deposit buying an average priced home of £250,00 in the UK, a quarter point rise in mortgage rates this will add hundreds [£264] to their annual mortgage bill. Most homeowners will be protected from the current raft of interest rate rises as three quarters of those with outstanding mortgages are on fixed-rate deals.

“Even with five base rates since December last year, buyer demand in the housing market has remained strong all through the start of this year, and is still 50% above the five-year average – so those looking to sell should consider making a move while demand is at this level. With further interest rate rises on the cards in the coming months, and a cloudier economic outlook, buyer demand will ease through the rest of 2022.”

Lawrence Bowles, director of research at Savills, said: “Further increases to interest rates, combined with the strong price growth experienced over the past two years and the cost of living squeeze, will combine to limit the capacity for growth over the next few years. But rates are still low in a historical context, so it remains difficult to see the trigger for a meaningful house price correction. Mortgage rules in place since 2014 mean that buyers have had to show they can afford their repayments at interest rates 3% higher than expected, which means they are likely to be able to weather these increases in the base rate.

“These changes are less likely to have an impact in the prime residential markets. Most buyers in these markets are less reliant on mortgage finance when buying a home. Given the recent negative performance in equities markets, we may see a flight towards safe haven assets such as housing.

“Savills latest market forecast projects that price growth in the next four years (2023-2026) will average a total of 5.1% across the UK as a whole. This may be of some relief to many would-be buyers, many of whom will feel they have been chasing the market over the past two years.

“However, it’s clear that the Bank of England intends to act forcefully in the face of further persistent inflationary pressure, which could reduce capacity for price growth in markets where borrowing is already high relative to income.

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Iain McKenzie, CEO of The Guild of Property Professionals, said: “Hot on the heels of the US Federal Reserve, and its greatest rise in almost 30 years, the Bank of England has today prioritised curbing inflation by raising interest rates by 0.25%.

“Getting inflation under control will aim to improve the cost of living and help people to keep up with their mortgage and rent payments.

“Homeowners are facing increases at all angles and many will still be worried about the effects that a fifth straight hike could have on their mortgages.

“People on tracker mortgages or with a variable rate could see their repayments increase again which will be unwelcome at a time when everything from energy and fuel to food and drink is going up in price.

“Homeowners on fixed-rate mortgages are currently in the safest position, as this interest rate rise won’t affect them for the time being. It is important to keep track of when your fixed rate is up for renewal and be ready to secure a new deal.

“Our research indicates that around 1.5 million fixed-rate mortgages will end this year and next, so these interest rate rises will soon affect you when the time comes to renew.

“Homeowners should sleep soundly though that the value of their property is still very robust. The increasing demand to buy which we have seen in the last two years will continue to ensure that any short-term issues in the economy won’t cause your home to lose value.”

Read about the UK Housing Market via our Specialist Residential & Buy to Let Division

Richard Davies, MD at Chestertons, stated: “Anyone who has been following the news would have been likely to have expected the Bank of England’s decision to increase the bank rate. In anticipation, many house hunters were rushing to seal a deal on their property purchase last month and lock in a more favourable fixed rate. According to the Bank of England, 81% of outstanding mortgage loans are now on a fixed rate with an average rate of 2.06%.”

“We expect the new rate rise to impact particularly on new home owners whose mortgage loan to value is above 75%, those on a variable rate as well as property buyers in London, where the average mortgage value has surpassed £392,000. If we take that average and consider the recent rate increase, London homeowners could be facing an annual increase in mortgage payments of almost £600. A big addition to the already rising cost of living.”

Jason Tebb, CEO of OnTheMarket, commented: “This latest rate rise was factored in by the money markets, given continued high inflation, but we don’t expect it to quash the remarkable buyer and seller sentiment in the housing market.

Even with another quarter-point rise, interest rates remain relatively low. We are gradually moving towards a more rebalanced market in terms of supply and demand, with evidence emerging of a rise in the number of new instructions. Yet this will take time and until then, the ‘new normal’, an elevated version of the pre-pandemic market continues. Regional differences are also a consideration, with ‘one size does not fit all’.

As long as buyers remain confident about obtaining the mortgages they need and being able to afford them, modest increments in rates, while unwelcome, are unlikely to result in a slamming on of the brakes. It remains the case that many buyers simply need to move.”

Dominic Agace, chief executive of Winkworth, remarked: “We are beginning to see a divergence in the impact of the cost of living and interest rates and their impact in the property market. Country markets, where there have been rapid price increases since the pandemic, are now cooling in terms of demand. Although demand is easing in London where prices have remained fairly static, it still remains ahead of 2021.

“We expect the interest rate increase and wider economic concern to impact on demand, but expect London markets to outperform this trend, remaining positive through the autumn market. In both cases, there is sufficient underlying demand, headroom in interest rates and a strong enough labour market to allow several more rises before there will be concerns about price corrections. So far, we are seeing an easing rather than seeing a cause for concern. We would expect the slow trajectory of interest rates with five year mortgages cheaper than two year fixes to lead us this way.”


Source: Property Eye Industry