There’s no doubting the ultra-competitive nature of our market has provided a compelling opportunity for advisers and their clients.
Low rates have not just been confined to the residential market but within buy-to-let the same trend has persisted. However, what makes it even more interesting is this doesn’t chime at all with what has been happening to swap rates recently.
Take a look at SONIA (the Sterling Overnight Index Average) – a rate based on actual transactions and reflecting what banks are paying to borrow sterling overnight from other financial institutions and institutional investors.
Back at the end of July, five-year SONIA swaps were 0.42 per cent; on 12 October they had more than doubled to 0.88 per cent. It’s an even more graphic rise for two-year swaps over the same timescale, moving from 0.22 per cent to 0.71 per cent. In other words, everyone is paying considerably more for their money.
As you’ll no doubt be aware pricing has actually gone down during that period. When you consider just how many lenders use the credit markets to fund their mortgage lending, it seems somewhat odd.
Why hold or drop rates on your products when it’s costing you more to fund them and when you’ll be making even less margin?
It also justifiably begs the question, how long can what seems like a contradiction in the way our sector works continue and who will blink first when it comes to putting rates up? The traditional trend is that when one moves, others will follow.
As I write, lenders appear to have their eyes fully open in the buy-to-let space but are potentially beginning to blink in the residential market. Again, in mid-October, news was filtering through that NatWest and HSBC were about to inch up rates for higher loan to value borrowers.
The next big question is how will others react? Will the competition feel this presents an opportunity for them to secure volumes, even at less margin, because their competitors have repriced upwards. Or will they believe that they must follow as they fear being left as the last lender standing at a particular price point which means large levels of business that they’ll be unable to service effectively?
It is a quandary and one that I suspect buy-to-let lenders will also face in due course as well. Also, even though Bank Base Rate (BBR) is generally unrelated to mortgage product rates if the mood music begins to change and the Monetary Policy Committee ups BBR as it is expected to do before Christmas, then we could see an acceptance that this period of historically low rates has ended and a mass movement of rates.
For advisers, it presents an interesting conundrum in terms of the advice to be given especially over the next couple of months. The likelihood is that rates will still be relatively low after this but they won’t be as competitive as they currently are.
