It is interesting just how quickly the ‘mood music’ can change in our market. While everyone was fully anticipating the MPC to increase bank base rate (BBR) again this month, there was some hope that this rise might be the last for some time.
Perhaps BBR has peaked, many wondered out loud? If inflation is on the way down, then the need for further increases might not be so compelling?
However, within days it seemed that belief might be ebbing away. Indeed, it looks like certain members of the MPC have been preparing the ground for further increases. Catherine Mann, admittedly just one member of the MPC, explicitly said that “the next step in bank rate is still more likely to be another hike than a cut or hold”.
That view is based on inflation staying higher for longer, and we know that the bank has a very limited number of tools to bring inflation down. You might even argue, it only has one – raising rates – and it may well feel it needs to pull that lever even harder in order to get the falls in inflation it wants to see. Indeed, it needs to deliver.
In a situation which might seem somewhat odd to Joe Public, at a time when base rate was raised to four per cent, we have started to see fixed rates at lower loan to values (LTVs) in the residential space come in below this.
The swap rate effect
We know this is much to do with what is happening with swap rates at the moment, with three, five, seven and 10-year money all below BBR, albeit in recent days we’ve seen this starting to edge up.
There is clearly still a level of volatility at play here, and that is just the same in the buy-to-let space as much as any other mortgage sector. In recent weeks, we’ve seen pricing – particularly for longer-term fixes – coming down, but we can’t be said to be following ‘normal’ patterns just yet, for example, it’s still very difficult to price two-year fixes in the current climate.
Affordability remains a major issue for landlord borrowers, and we are still perhaps not at the market ‘tipping point’ where current rate levels mean we get affordability to work for many more clients, and we therefore move into a much healthier position where greater levels of activity are possible.
Which is not to say we are too far away from this – as mentioned, if we can continue to have a stable situation regarding swaps, if those markets do continue to calm, then as mentioned, rates may continue to dip, and this provides a much better environment for landlords to make their finances work.
As an example, at the end of September last year, we were priced just below five per cent for our five-year fixes, and there was a significant amount of business being written. We are currently around the 5.3 per cent mark, and our view is we are not a million miles away from this being the point where landlords will feel they don’t need to wait.
Waiting it out
Admittedly, at the moment, there is still a slight tendency for some market participants to sit on their hands, and you can perhaps understand why. We don’t see this lasting much longer, particularly in terms of purchasing, and in the meantime, there is still of course a significant amount of remortgage business to be conducted.
The good news there is that those coming up to remortgage now are in a much better position than autumn last year, as we have seen rates fall and product choice grow.
Overall, therefore, it remains slightly more uncertain than we would like, but a lot of the mini Budget mist has undoubtedly cleared and will continue to do so as the year progresses.
Moving landlord borrower clients to their required destination is much more doable now and, in our view, that will continue to be the case throughout the rest of 2023.
