Pessimissm towards UK’s economic outlook to last until year-end – Maddox

Pessimissm towards UK’s economic outlook to last until year-end – Maddox

 

Global inflationary pressures have continued, exacerbated by the war in the Ukraine, causing significant rises in the cost of many goods and services particularly certain agricultural commodities and energy.  

UK inflation continues to rise and was at a record high of nine per cent in the 12 months to April; it is expected to sit at nine per cent in the near term and increase further to over 11 per cent in October, when the next Ofgem utility price cap increase is expected and could increase energy prices up to 30 per cent more. Looking further ahead, inflation is expected to decrease materially once energy prices stop rising, however the inflation target of two per cent is not expected to be met in the next two years. 

UK GDP growth was slightly lower than expected, increasing by 0.8 per cent in Q1 2022, however it is expected to fall by 0.3 per cent in Q2 2022. 

The latest Office for National Statistics (ONS) figures show unemployment has stabilised, remaining at 3.8 per cent in the three months to April, and employment grew by 0.5 per cent. Although we continue to see unemployment decreasing in the near term, it is expected to rise to 5.5 per cent in three years’ time due to slower economic growth. Regular pay (not including bonuses) increased by 4.2 per cent from February to April, however on a relative value once adjusted for inflation sat at -2.2 per cent, with rising inflation causing a real impact on households and their cost of living. 

Overall, markets seem pessimistic about the broader macro-outlook in the UK for the remainder of the year. 

 

  Forecast in rates 
Effective Rate  One month time  Three months’ time  Six months’ time  12 months’ time  Two years’ time  Three years’ time 
Bank of England Base Rate*  1.25 per cent   2.30 per cent  3.00 per cent   3.35 per cent   2.80 per cent   2.60 per cent  
Two-year Fixed Rate**  3.00 per cent   3.10 per cent   3.14 per cent   3.03 per cent   2.70 per cent   2.54 per cent  
Three-year Fixed Rate**  2.93 per cent  2.99 per cent   2.99 per cent   2.89 per cent   2.63 per cent   2.47 per cent 
Five-year Fixed Rate**  2.77 per cent   2.79 per cent   2.79 per cent   2.70 per cent  2.49 per cent   2.38 per cent  
10-year Fixed Rate**  2.54 per cent   2.55 per cent   2.55 per cent   2.50 per cent   2.41 per cent   2.36 per cent 

* Using OIS Curve [rounded to two decimal points] 

**Based on the swap curve 

 

Due to the continued rise in inflation, markets are expecting further steep increases in the Bank of England base rate with large increases throughout the rest of this year, exceeding two per cent within three months and hitting three per cent in six months. Markets also expect that the bank rate will increase further to over three per cent within the next 12 months.  

The two-year swap rate has reached its highest level since 2008 at just over three per cent, having not been over 1.5 per cent since 2008. Market participants expect it to sit around three per cent for the next 12 months before starting to decline in two years’ time, with the three-year swap rate following the same path. The five and 10-year swap rates are expected to remain relatively flat over the next 12 months, and then dropping slightly in the next two to three years. 

 

UK securitisation market

Primary markets have been quiet given the current market conditions, featuring rising interest rates and increased volatility. While we saw three residential mortgage-backed securitisation (RMBS) near-prime transactions accessing the market, they all have been pre-placed to minimise current execution risk. 

Currently in 2022, there has been c. £16bn of UK RMBS paper placed into the market compared to c. £9.7bn at this time last year and £6.3bn in 2020; however, this year only c. £6bn of that is from new originations, the remaining being large refinancing transactions of legacy assets. 

Santander updates affordability rates; Natwest increases FTB cashback and adds fee-free deals – round-up

Santander updates affordability rates; Natwest increases FTB cashback and adds fee-free deals – round-up

At the last Monetary Policy Committee meeting, the base rate rose to 0.75 per cent. 

Santander’s residential affordability rate is three per cent above its standard variable rate (SVR) which is set to rise from 4.74 per cent to 4.99 per cent at the beginning of May. 

A spokesperson for the bank said: “We have adjusted our stress rates to account for March’s increase to the Bank of England base rate and, in line with our obligations as a responsible lender, ensure that the mortgage will be affordable to the customer in the longer term.”

 

Natwest

Natwest has increased the cashback available on its mortgages for first-time buyers, launched fee-free products and upped rates on some of its deals.

Cashback has risen from £750 to £1,000 on 85 and 90 per cent loan to value (LTV) purchase products fixed for either two or five years.

Rates have also increased by as much as 0.12 per cent, starting from 2.78 per cent for a fee-free product at 85 per cent LTV, a 0.05 per cent change. Meanwhile, a fee-free deal at 90 per cent LTV has a rate increase from 3.17 per cent to 3.22 per cent.

Added fee-free products include shared equity mortgages at 60 and 75 per cent LTV, fixed for two and five years. Rates vary from 2.7 per cent to 2.79 per cent. Fee-free options have also been added to the help to buy, and buy-to-let ranges, also at 60 and 75 per cent LTV, fixed for either two or five years.

For residential and buy-to-let borrowers switching rates, two and five-year fixes between 60 and 90 per cent LTV have been pulled and replaced by products with higher rates.

Residential switch rates between 60 and 90 per cent LTV, fixed either for two or five years have risen by as much as 16 basis points.

Rates on the 95 per cent LTV mortgage guarantee scheme products have increased by 0.11 per cent for the two-year fix to 3.2 per cent, and by 0.12 per cent for the five-year fix to 3.22 per cent.

Changes come into effect from 29 April. Mortgage illustrations can be produced and online applications can be submitted until 10.30pm 29 April.

 

Upping the notice period when product pricing shifts – Carrasco

Upping the notice period when product pricing shifts – Carrasco

This wasn’t surprising in itself because I’m fully aware of the quality and robustness of the propositions represented, but given some of the mood music being played around the property market at present, particularly in terms of rising rates and the like, it was heartening to hear such positivity.

Essentially, these firms are incredibly positive about the mortgage market and what they intend to achieve this year. The suggestion was that January had started off relatively slowly for some, but as the weeks have passed, they have been dealing with an increasing level of enquiries which are now turning into applications and completions.

As you might expect, remortgage activity was tending to drive that business, but that’s not to say purchasing isn’t also solid. Evidently, supply remains the biggest issue here but the common sentiment focused on the homes that are coming to market selling in double-quick time.

Purchase demand still prevalent 

Perhaps this shows most clearly how the purchase demand that drove our market in 2021 hasn’t really gone away, and that even without any sort of stamp duty incentive – unless you’re a first-time buyer – this is still a market in which people want to buy and move.

Supply levels will of course determine just how much business is written, but it’s also true to say that rates, specifically rate movements, are likely to drive further remortgage activity. Especially given the direction of travel here is upwards.

At present, we are in a changeable situation with regards to rates. Historically, of course, we’re still at incredibly low levels. This is good news for the borrower as is the ultra-competitive market we have, the lending targets that have to be hit throughout the year and the anticipation that due to this, we may not see full rate increases being translated into product pricing.

Rising rate opportunities 

Upward rate movements can be used by advisers in terms of marketing activity to existing borrowers, particularly those most impacted by rises such as standard variable rate and tracker borrowers, and those who might be coming to the end of special rates.

In that sense, rate rises – bank base rate (BBR) or swaps – might not be the harbinger of doom some are making them out to be.

Of course, rate rises do often mean rate changes at a lender level. There were certain frustrations expressed at our forum, notably around the short notice periods some lenders are providing when changing rates and pulling products.

On that matter, we appreciate that BBR and swap rates do change and lenders have to react quickly, especially in certain areas where no lender wants to be the last one standing and inundated with business it can’t service.

Rate changes are part of the mortgage ‘game’ and it was clear from our adviser discussion that there are still plenty of opportunities to be secured from a rising environment, however long this might last.

Pricing shifts all the time, but advisers would certainly like to be forewarned and therefore forearmed as much as possible when lenders do make their moves, and they have to accept their own responsibility for managing client expectations in that regard.

Aldermore to change variable mortgage rates in line with BoE decision

Aldermore to change variable mortgage rates in line with BoE decision

This means that existing customers with mortgages linked to the base rate will see their payments go up in line with the 0.25 per cent hike from 1 April, and as of 22 March all new illustrations and mortgage offers will also reflect the increased rate.

At the Monetary Policy Committee’s meeting this week the base rate rose to 0.75 per cent, bringing it back to its pre-pandemic level.

Aldermore’s standard variable mortgage rate, the Aldermore Managed Rate (AMR), will increase from 4.98 per cent to 5.23 per cent from 1 April for existing customers. All new mortgage offers and illustrations including product transfers will reflect this.

Aldermore customers affected by the announcement will be informed of the changes to their account.

The lender’s move to raise its rates follows the lead of others such as Santander and Nationwide in making adjustments to reflect the change.

Top 10 most read mortgage broker stories this week – 04/02/2022

Top 10 most read mortgage broker stories this week – 04/02/2022

 

Masthaven exiting the UK banking sector was also well read, as was the news that Virgin Money was planning to be selective with its mortgage lending because of intense competition.

 

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Competition means we have to be ‘selective’ with mortgage lending, warns Virgin Money

Base rate rises to 0.5 per cent with further increase narrowly missed

Base rate rises to 0.5 per cent with further increase narrowly missed

 

The decision was split five-four between the committee, with the minority voting to increase the rate further to 0.75 per cent. Members Jonathan Haskel, Catherine Mann, Michael Saunders and Dave Ramsden voted to raise the rate.

The MPC said the decision was made to help inflation return to its two per cent target after it surged to 5.4 per cent in December, its highest level for nearly 30 years. 

The committee said higher energy and goods prices were pushing inflation up, and predicted it would hit seven per cent in Spring before falling over the year. 

“We expect inflation to fall back from the middle of this year. We don’t expect that energy prices will continue to rise as fast, and the shortages that are currently making it difficult for businesses to make their products should ease. We expect inflation to be close to our target in around two years’ time,” the committee said. 

Last week, economists speculated that the base rate would rise to 0.5 per cent at the February meeting and predicted there would be three more increases this year before reaching 1.25 per cent. 

MPC’s announcement added: “We have raised the official interest rate we set, known as Bank Rate, to 0.5 per cent to support inflation returning to our two per cent target.   

“We may need to raise interest rates somewhat further. Our job is to ensure that inflation returns to our target in a sustainable way.” 

 

GDP recovery

The committee said the Omicron variant had suppressed economic activity but this was expected to recover in February and March. Beyond that, GDP growth is expected to slow to subdued rates, the announcement read as higher living costs impact income and spending.

 

Market predictions confirmed

Henry Knight, managing director of mortgage broker Springtide Capital, said: “With the Bank of England having increased the interest rate twice within a short period of time already, it remains to be seen if another raise is likely to happen later this year. Some economists predict interest rate to reach up to 1.25 per cent by next year, which, compared to the current rate of 0.5 per cent, would have a much more significant effect on buyers.

“Until then, with the majority of homeowners being on fixed long-term mortgage rates, we don’t expect the latest increase to cause any major impact on the market.”

Joshua Elash, director of property lender MT Finance, said the rate rise was “an absolute necessity as a first step towards calming inflation” and it had already started to impact the wider economy.

Miranda Khadr, founder and chief executive at Pitch 4 Finance, held different sentiments saying it was “irresponsible for the Monetary Policy Committee to raise the base rate this month, despite the rise in inflation”.

She added: “The cost of essential day-to-day to living requirements such as food, gas and electricity, have been going up and more people are struggling to get by. There are too many things happening at once for rates to go up now. If you add in tax hikes that are due soon and higher interest rates people’s finances will suffer even more.”

“Not everyone is shielded by a fixed rate, especially those with commercial mortgages. SME property developers have had to deal with rising costs of materials and labour so adding in higher mortgage payments will be a blow to them. It will lead to higher house prices and push more first-time buyers and upsizers out of the market.”

 

High chance of base rate rising to 0.5 per cent next week, economists predict

High chance of base rate rising to 0.5 per cent next week, economists predict

 

According to economists, there is a 95 per cent chance of the base rate rising to this expectation next week. By the end of the year, the base rate will be set at 1.25 per cent following a series of increases, it has been predicted.

If this happens, this will take interest rates to their highest level since February 2009, AJ Bell said. 

The investment firm also said subsequent higher mortgage rates would “take some steam out of the housing market”. 

It added: “Prices could fall, but a moderation of price growth seems more likely, given the ongoing imbalance between supply and demand, and the presence of continued government support in the form of Help to Buy and the Mortgage Guarantee scheme.  

“The Bank of England certainly won’t want to put so much strain on the economy that homeowners are posting their keys through the letterbox as they leave, because they can’t afford mortgage payments.” 

However, AJ Bell’s report hinted at uncertainty as it noted it would not be the first time the market “got ahead of itself” with regards to interest rates. 

Laith Khalaf, head of investment analysis at AJ Bell, said: “A rate rise at the Bank’s February meeting is all but inked in, which if realised would be the first time since 2004 that the bank has raised interest rates in two consecutive meetings.  

“Market pricing suggests a further three hikes this year, taking base rate to 1.25 per cent by the end of 2022, which would be its highest level since February 2009, just before an ‘emergency’ rate of 0.5 per cent and Qualitative Easing were introduced.” 

He added: “Market pricing can change pretty quickly, and of course, this wouldn’t be the first time markets have got ahead of themselves when it comes to betting on rate rises that never materialised. 

“Last November, markets were certain we were going to get a rate hike, but seven out of nine committee members voted to keep rates on hold. Today though, consistently high inflation and a buoyant labour market make a prima facie case for tighter monetary policy, and having raised rates in December, the Bank’s policy setting committee has some momentum behind it.” 

Rising mortgage rates will cause house prices to cool in H2, Capital Economics predicts

Rising mortgage rates will cause house prices to cool in H2, Capital Economics predicts

 

According to Capital Economics’ housing outlook, increased household cash savings, remote working and rates remaining at record lows for now will strengthen demand in the near term. 

It referred to Zoopla and Rightmove reports which revealed heightened levels of searches during December, as well as reports from the Royal Institution of Chartered Surveyors (RICS) suggesting buyer demand continued to outstrip supply. 

However, with inflation predicted to reach a peak of seven per cent this year, Capital Economics forecast there will be four more rate hikes to curb this taking interest rates to 1.25 per cent. 

The firm predicted this would bring the average rate on newly-drawn mortgages from its current low of 1.5 per cent to 2.4 per cent by the end of the year. 

Andrew Wishart, property economist at Capital Economics, said: “Combined with the large rise in house prices since the pandemic began, that will push up mortgage payments as a share of income to its highest since 2008.” 

However, he noted that house price growth was not yet in its correction phase. 

He added: “Overall, house prices look set to surpass most forecasters’ expectations in the first half of the year, but then as the rising cost of mortgage finance weighs on demand.  

“Our forecast of a five per cent year-on-year rise in prices in Q4 2022 compares to a consensus expectation of 2.5 per cent.” 

Nationwide amends rates in light of base rate decision

Nationwide amends rates in light of base rate decision

 

This will apply to its fixed and tracker mortgage rates from 1 February. Borrowers who are on applicable products will see new rates of 2.25 per cent for BMR deals and 3.74 per cent for SMR mortgages. 

Additionally, Nationwide has made a raft of rate changes to select products which will be effective from tomorrow. 

These include its two and five-year fixed rate products up to 95 per cent loan to value (LTV) and selected two-year tracker rates up to 85 per cent LTV, which will see rates go up by between 0.05 per cent and 0.20 per cent.  

The mutual’s three-year fixed rates will also no longer match the equivalent two-year fixed rate products as the rates on these products will rise by between 0.05 per cent and 0.45 per cent. 

For first-time buyers, the five-year fixed rate at 60 per cent LTV, the two-year fixed rate at 85 per cent LTV and the two-year tracker at 80 per cent LTV have all increased by 0.05 per cent. 

These come with a £999 fee and are now priced at 1.52 per cent, 1.54 per cent and 1.24 per cent respectively. 

The two-year fixed rate for home movers at 75 per cent LTV has increased by 0.05 per cent to 1.54 per cent with a £999 fee. The two-year fixed rate option at 85 per cent LTV with a £999 fee has risen by the same to 1.44 per cent. 

Nationwide is also increasing shared equity mortgage rates by up to 0.10 per cent on five-year fixed rates between 60 and 75 per cent LTV. 

Switcher and additional borrowing rates will also rise by up to 0.45 per cent on selected fixed rate and tracker mortgages. 

Henry Jordan, Nationwide’s director of mortgages, said: “We regularly review our mortgage range and these latest changes to our new business and switcher rates are reflective of the current environment. 

“With swap rates continuing to increase, fixed rates have begun to move upwards and our new rates follow changes made across the mortgage market. We are also increasing our BMR and SMR rates in line with the bank rate rise.” 

He added: “We are announcing these now to give borrowers certainty about what their payments will be from 1 February as well as time to consider switching to one of our fixed or tracker products, all of which are priced the same or lower than our equivalent remortgage rates.” 

Rising inflation could see base rate increase to 40bps early next year – Maddox

Rising inflation could see base rate increase to 40bps early next year  – Maddox

 

The last time the MPC raised interest rates was in August 2018, when it reached 0.75 per cent. The committee voted unanimously to maintain the BoE Quantitative Easing (QE) programme of asset purchases, which will result in buying £875bn government bonds, along with £20bn of corporate bonds. 

UK GDP increased in Q3 2021, although slower than predicted due to supply chain disruption. However, it’s on track to return to pre-Covid levels in Q1 2022.  

The BoE revised down its expectations for UK GDP for Q4 2021 by around 0.5 per cent since the November report, leaving the economy around 1.5 per cent off its pre-Covid level.  

Inflation rose to 5.1 per cent last month, hitting a decade high.  

Bank of England governor Andrew Bailey commented that rising gas prices, driven by tensions between Russia and Ukraine, will push UK inflation to six per cent in the next few months – the highest level in 30 years.  

The latest Office for National Statistics (ONS) unemployment figures continue to see a stable outlook with another slight decrease down to 4.2 per cent in the three months to October. However, we remain to see whether this continues now that the government’s Coronavirus Job Retention Scheme has ended.  

The BoE said it now expected Britain’s unemployment rate to fall to around four per cent before the end of this year, much lower than the November report projection of 4.5 per cent. UK employers have suffered staff shortages this year as Brexit compounds the loss of migrant workers caused by the pandemic last year. 

 

  Forecast in rates 
Effective rate  One month time  Three months’ time  Six months’ time  12 months’ time  Two years’ time  Three years’ time 
Bank of England base rate*  0.250   0.395   0.699   1.044   0.990   0.829  
Two-year fixed rate**  0.609   0.623   0.917   1.145   1.120   0.953  
Three-year fixed rate**  0.979   1.059   1.121   1.151   1.035   0.894  
Five-year fixed rate**  1.020   1.064   1.092   1.085   0.968   0.854  
10-year fixed rate**  0.966   0.987   0.995   0.973   0.884   0.804  

* Using OIS Curve [rounded to five basis points (bps)] 

**Based on the swap curve 

 

Markets expect the BoE base rate to increase to around 40bps in early 2022 and then increase over the next year in line with the implied path. 

Market participants also expect two and three-year swap rates to increase steadily over the next year. Rates are anticipated to drop back down slightly in two and three years’ time.  

While the five and ten-year swap rates have been slowly increasing, rates are set to remain quite flat over the next three years. 

 

UK securitisation market 

While the primary market remains quiet as we enter the holiday season, in 2021, just under £13.5bn of UK residential mortgage backed securities (RMBS) paper has been placed into the market compared to £13bn last year – and £20.7bn in 2019.

Levels remain lower than pre-Covid due to the continued low amount of prime issuance into the market.