Behind the scenes of commercial pricing – Wray

Headlines express surprise that the base rate has gone down, but mortgage rates increase, which was the story in February. However, the pricing of mortgages is not directly correlated to the base rate.

How funding works

The fact is that there’s more to funding mortgage rates than meets the eye. In fact, only tracker mortgages are directly linked to what the base rate is doing, as by nature, they ‘track’ its movement. But these only make up a small percentage of mortgages, with fixed rate products comprising roughly 75% of the market.

Lenders fund their mortgages in two main ways – ‘retail’ and ‘wholesale’. Examples of retail funding include deposits from savers – including savings products such as fixed rate bonds and ISAs, or cash in current accounts. Wholesale funding includes secured and unsecured borrowing from financial institutions such as banks, insurers and asset managers, using assets as collateral.

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The volatility of mortgage rates

Swap rates are the foundation of mortgage pricing and are used to manage our interest rate risk. We do this by taking wholesale funding at a variable rate and then executing an interest rate swap to hedge the interest rate risk. Swap rates are predictors of where the market is going to go in the future, and they are directly linked to funding costs. They can be very volatile and impacted significantly by outside pressures such as economic factors, global and political events and inflation.

For example, where a swap rate with a two-year term is higher than the base rate, the market expects the average base rate to be higher over the next two years. The expected base rate can change, and, if this expectation moves higher, so would the swap rate, and most likely the fixed rates we can offer to customers. This is something we’ve seen recently – for example, when Donald Trump became US President once again and made announcements around trade tariffs, impacting the global economy.

Mutuality matters

As the commercial lending arm of Yorkshire Building Society, our fixed rate mortgage funding involves a simple business model using members’ savings to enable the products offered to mortgage customers.

We balance the income we generate – paying interest to our savers that is above market average, but with no external shareholders to satisfy, profits can be reinvested in the business to improve our offering to members, brokers and customers, as well as to improve our technology, systems and processes. We also invest in our underwriting and sales teams, adopting a hands-on approach to lending.

This model means that we can be more flexible and lend more purposefully. For example, we recently improved our housing of multiple occupation (HMO) offering, restructured our buy-to-let (BTL) range in response to market conditions, and made significant changes to our broker portal, improving efficiencies and making the application journey quicker, easier and more flexible for brokers and their clients.

Our funding model as part of Yorkshire Building Society also gives us a core stability, which is unique in the commercial market, and means that we can be as consistent as possible with our pricing – offering reassurance and long-term certainty to brokers and customers.

The future for fixed rate mortgages

In terms of the direction of travel for mortgage rates in the commercial world, there are expectations that the base rate will come down to 3.75% by the end of the year. However, that’s not to say that mortgage rates will change much unless something happens that the market is not expecting. The ballpark of rates in which we find ourselves are here for the longer term – so my message to anyone looking for a deal would be not to wait for rates to drop before acting.

All that said, we understand that it’s not just about rate. As a business, we always aim to add value in many other ways, such as reducing our enquiry response time to just 24 hours, and focusing on the dedicated personal service provided by our teams, and we understand how important this is to brokers and customers.

We also understand that the great thing about the commercial market is that not all lenders are the same. There’s room for many different pricing strategies, as we work together to support the commercial market and all the brokers and customers that comprise it.