Markets disappointed by only £1bn increase in QE – Maddox
Furthermore, policymakers announced the expansion of quantitative easing (QE) by £100bn, disappointing the markets which were expecting a higher stimulus.
This means the total QE target of £745bn should be reached at the end of this year.
The MPC stated in its minutes that the fall in global and UK GDP in Q2 would be “less severe than set out in the May report”, but it would be difficult to make a “clear inference” about the recovery thereafter.
It added: “recovery in demand and output was occurring sooner and materially faster than had been expected”.
GDP fell by 10.4 per cent in the three months to April 2020, and monthly GDP fell by 20.4 per cent in April 2020, following a six per cent fall in March.
The minutes also highlighted that UK households were likely to behave cautiously despite the relaxation of Covid-19 restrictions, therefore there was a risk of unemployment being “higher and more persistent”.
Meanwhile, Office for National Statistics (ONS) data showed that inflation had fallen sharply to a four-year low from 0.8 per cent in April to 0.5 per cent in May.
This is well below the Bank of England two per cent target with the drag in inflation the result of the collapse of demand due to the pandemic.
Three years at zero
The market now expects the BoE base rate to remain at close to zero basis points (bps) for the next three years.
Interestingly, while negative rates have started to be a hot topic in the markets, governor Andrew Bailey noted that negative rates were not discussed during the MPC meeting, pushing away the talks to a further rate cut for now.
Forecasts for three-month London Inter-bank Offered Rate (Libor), two-year, three-year and five-year swap rates remain at 25bps for the next three years.
The forecast for 10-year swap rates remains at 50bps.
Brokers plan more homeworking and less office time post-lockdown
Some 100 brokers were asked what proportion of their time they spent working in an office before the Covid-19 pandemic hit the UK.
The results, revealed on Kensington’s webinar, showed that on average brokers spent 69 per cent of their time in an office, and the remaining 31 per cent of their time working from home.
But as lockdown restrictions begin to ease, brokers were asked if they planned to return to their pre-pandemic working habits.
The split between time spent working from home and in the office narrowed, with brokers planning to spend 57 per cent of their time in the office and 43 per cent at home.
Mortgage broker Rachel Dixon of RD Dixon told Mortgage Solutions she has loved working from home during lockdown so much she plans to drastically change the way she works.
Before the restrictions came into force, she spent the majority of her time working in the office but after being forced to relocate her business to her house full time, she plans to continue working remotely.
“I have adjusted to working from home probably better than I thought I would,” said Dixon.
“I did have an office, however, my husband is now using it. Working for the police, his work is more sensitive than mine so he I’ve moved to the downstairs table. But at least I get to open the double doors, it feels like I am letting the outside in.
“We have also been looking at getting a home office/gym to be built in the garden so moving forward I have everything I need right here. I think in the future, I may choose to just do one day at the office and the remainder from home.”
Homeworking has improved Dixon’s work-life balance. She does not have to work as many Saturdays as she did in the past because most of her clients are also working from home. Now she can plan her weekdays and lunchtimes more easily to work around them.
Setting up costs
Taking the leap to complete homeworking can be expensive. When Stuart Gregory, managing director of Lentune Mortgage Consultancy, relocated from his town centre office in Lymington around 18 months ago he spent £7,500 setting up a work space in a log cabin in his back garden.
“We had seen a reduction in daily footfall – with many clients preferring a meeting in their own home and after normal office hours,” said Gregory.
“And with Brexit progressing, we wanted to future proof our business by reducing our business outgoings.
“The set up costs were around the same as a years’ worth of rent for our previous office. So working remotely from home makes perfect sense for us presently – we’ve only lost one potential client since we did it who wanted to visit our town office instead.”
Missing the ‘social buzz’
Not all brokers are desperate to ditch the commute and the bustle of a busy office however. Jane King, mortgage and equity release adviser at Ash-Ridge Private Finance, normally only works from home two days a week and has no plans to change that.
She said: “I love London so I am currently going there once a week to work just because I can. I normally work from home two days a week which is enough for me.
“Although I do longer hours at home I miss the social buzz of London, the chance to meet new people and the pubs and restaurants. I can’t wait to get back more often.”
While homeworking is the government’s preference for the public right now, when restrictions are lifted Chris Hall, mortgage adviser at Mortgage Guardian, said brokers should be ready to adopt a hybrid approach.
He believes incorporating remote advice, face to face appointments in clients’ homes, and in person networking to generate new business is the optimal strategy.
He manages a team of brokers and when restrictions are lifted, will be helping them to adapt to the new way of working.
Kensington reveals plans to help lockdown-hit borrowers and securitisation deal
The specialist lender said that after the securitisation, it will be in a position to relaunch competitive deals supporting people who have been affected by the crisis.
Speaking on Kensington’s webinar, Post Lockdown: The Future for Brokers and Customers, new business director Craig McKinlay, said: “We are looking to do a securitisation this week which will the first securitisation in the market post-Covid.
“That will then give us the funds so we can expand our product range back to something similar to what it looked like previously.
“We will be able to reduce some of our pricing especially on buy to let, which we raised, so we can get back to being really competitive.”
After that, Kensington said it wants to release a new suite of deals that will serve the cohort of borrowers who have suffered financial hardship during the coronavirus pandemic.
Sympathetic and sensible
“We will be looking at a post-Covid product range that takes account of people who have had temporary hardship or been on furlough or payment holidays and have got back to normal,” he said.
The lender conducted a survey of 100 brokers to find out what kind of deals and lending policies were needed to support borrowers looking for mortgage finance in a post-Covid 19 market.
Respondents said they wanted lenders to take a flexible, sympathetic and sensible view of borrowers’ circumstances.
For example, if an applicant had been furloughed and had restarted work, and made some mortgage payments after a payment break, brokers felt lenders should treat them the same as they would before the pandemic.
McKinlay added: “That [circumstance] would feed into the specialist lender world where we operate. Most of the specialist lenders don’t credit score and have human manual underwriting so [the case] is less likely to get kicked out by an algorithm.
“It is a real opportunity for us specialist lenders to step up with some good post-Covid products to make sure we treat customers sensibly.”
Kensington reduces range to 75 per cent LTV but still accepting applications
However, the lender has been hit by the restrictions imposed upon valuers and others involved in the process.
The lender told Specialist Lending Solutions that it was continuing to accept applications but it would only be able to progress these to the valuation stage at present.
Kensington Mortgages new business director Craig McKinlay said it was an unprecedented time for everyone and that customers, lenders and the wider industry must all work together.
“We’ve decided to remove some of our product ranges to try and protect our customers during this uncertain time,” he said.
“However, we have absolutely no plans to pull our full range and are in a strong position with our funding. We will continue to monitor the current environment and are in close contact with UK Finance to keep up to date with official guidance and industry best practice in these exceptional times.”
On the issue of valuations he added: “We have an industry wide challenge obtaining physical valuations and we are working on a contingency solution which we hope to have in place soon.
“However, in the meantime any new cases will not proceed past valuation until this is resolved.”
Masthaven is still accepting new applications, but did not give any more details about alterations to products or processes.
Market reactions to coronavirus should keep mortgage rates down
Maddox told Mortgage Solutions that falls in swap rates over the last two weeks would make it more likely the Bank of England would hold or potentially reduce its key base rate.
But Maddox highlighted that he does not anticipate major shifts in mortgage rates unless the economic situation becomes more serious.
Markets have reacted strongly to the spread of the coronavirus as fears about its impact and potential impact on some industries have scared many investors.
The FTSE 100 in London is currently suffering its worst week since 2011 – dropping more than 500 points since Monday, while European and North American markets have tumbled.
Government bond yields have also fallen in the US and this has led to predictions of mortgage rates dropping notably across the Atlantic, but that may be some way off in the UK due to the differing way mortgage lending is typically funded.
Swap rates sliding
“In the UK, we have seen swap rates come down from about 0.65 per cent to 0.55 per cent in the last 10 days, as the market is predicting slower central bank rate increases,” Maddox said.
“For mortgages, lenders also have an eye on deposit rates, but there will definitely be an impact and I think it will help keep mortgage rates down.”
However, Maddox noted there could be pressure from external funding sources which may prop rates up if funders chose to wait out the impacts of the virus.
“The cost of wholesale funding could go up a little bit as investors may sit on the side lines, so if the cost of borrowing for big UK banks goes up then that would counteract the reduction in swap rates and push mortgage rates up,” he added.
MPC hedges its bets with latest base rate hold – Maddox
However, division continues to remain between the MPC members with the same two voting for a rate cut three times in a row.
Growth on the horizon
The MPC highlighted that since its December meeting, recent indicators suggested that global growth has stabilised, supported by the partial easing of trade tensions and loosening of monetary policy by many central banks over the last year.
Against this backdrop, UK GDP growth is projected to modestly increase in early 2020, driven by a pick up in global activity, a further decline in Brexit uncertainties and the government’s announced spending measures.
The MPC reiterates that monetary policy will be set to ensure a sustainable return of inflation to the two per cent target, and may either need to reinforce the expected recovery in UK GDP growth should the more positive signals from recent indicators not be sustainable or weak, or could see “some modest tightening” if the economy recovers in line with the MPC’s expectations.
The committee discussed rising business confidence and investment intentions domestically, the receding near-term uncertainties facing the UK businesses and households, and the recovery of the housing market indicators and consumer confidence.
The MPC will monitor closely these indicators and other domestic activity data to assess the sustainability of an improved outlook in the coming months.
UK GDP fell in November by 0.3 per cent, and growth on a rolling three-month basis fell to 0.1 per cent due to broad-based weakness in services and manufacturing output.
GDP in 2019 Q4 is likely to be flat versus last quarter, slightly below the MPC’s forecast in its previous meeting.
However, on a positive note, employment growth rose sharply in the three months to November, with the increase skewed towards full-time employees.
Average weekly earnings rose by 3.4 per cent in the private sector. Despite mixed indicators of domestic consumption, consumer confidence picked up in December.
The housing market remained strong and the BoE expects the UK house price index (HPI) to rise strongly in both 2019 Q4 and 2020 Q1.
Graph: UK two-year swap rate expectation
Leeds BS and Kensington cut rates
Highlights of the rate cuts include a 1.99 per cent 60 per cent LTV deal, reduced by 0.13 per cent and a 0.10 per cent cut to its 2.19 per cent two year deal available to landlords with a 30 per cent deposit.
The mutual’s new 80 per cent LTV deal comes with a rate of 3.40 per cent and is fixed for two years. It has a £399 fee and comes with a free standard valuation and fees assisted legal services.
Meanwhile Kensington has reduced rates on its residential mortgages. The lender has cut the cost of its select, professional, later life, core and Right to Buy mortgages by up to 0.15 per cent.
Interest rates on the select range now start at 2.34 per cent for a two-year fix at 75 per cent LTV. For young professionals, rates now start at 2.54 per cent for a two-year fix and 3.24 per cent for a five-year fix, all at 75 per cent LTV.
Reduced rates are also available for Kensington’s select premier mortgage range for loans up to £2m. Rates start at 2.44 per cent for one-year fixed or 3.19 per cent for five-year-fixed at 75 per cent LTV.
On Kensington’s Help to Buy range, rates now start at 3.49 per cent for a two-year fixed rate and 4.14 per cent for a five-year deal. Both mortgages are available up to 75 per cent LTV.
Bank of England’s rate hold sends a cautious message – Alex Maddox
For the first time since June 2018 the vote was split as two members of the MPC voted for a 25bps cut in interest rates, citing downside risks to the bank’s growth projections from weaker global growth and more persistent Brexit uncertainties affecting corporate and household spending.
Although the bank stated that monetary policy could respond in either direction, with a rate increase or rate cut depending on changes in the economic outlook, the market saw a conservative message reflected in the dissenting votes of MPC members.
Updated forecasts for GDP growth and inflation
The bank now expects UK GDP growth to pick up from one per cent in 2019 to 1.6 per cent in 2020, supported by dissipation of Brexit-related uncertainties, easier fiscal policy and gradual recovery in global growth.
However, as compared to its August projection, growth forecasts for 2021 and 2022 are lowered to 1.8 per cent compared to 2.2 per cent in 2021, and 2.1 per cent compared to 2.3 per cent in 2022.
The changes in forecasts reflect a weaker global growth and prevailing Brexit uncertainties. Overall, uncertainties over global trade talks and the ultimate format of Brexit should continue to weigh on domestic consumption and investment.
Inflation is projected to edge lower in the near term, reflecting temporary effects of lower regulated energy and utilities prices. However, the Consumer Prices Index (CPI) is projected to rise to two per cent in 2021 and 2.2 per cent in 2022, as rising excess demand should lead to stronger domestic inflationary pressures.
Unemployment is expected to remain low and wage growth is projected to be relatively strong, averaging 3.75 per cent for the period of Q4 2019 to Q2 2020.
Asset purchases maintained
The MPC voted unanimously to maintain the stock of sterling non-financial investment-grade corporate bond purchases, at £10bn and the stock of UK government bond purchases at £435bn.
The MPC reiterated that monetary policy could take either direction, either a rate increase or a rate cut, in order to restore the inflation to the two per cent target.
However, the market thinks the central bank is likely to be more supportive of the economy amid weak global growth and ongoing Brexit uncertainties with a 0.25 per cent cut in 2020 if global markets fails to stabilise or if Brexit uncertainties continue.
The market currently forecasts a rate cut in H1 2020. The rate market remained however unchanged, with the three-month London Interbank Offered Rate (Libor) two-year swap rate, three-year swap rate, and five-year swap rates expected to remain at 75 bps for the next three years and the market continues to expect a flat rate curve.
The ten-year swap rates are expected to stay at one per cent for the next three years.
Kensington warns mortgage brokers to evolve as distribution channels change
The lender also revealed it had seen calls to its broker support team cut by more than 20 per cent thanks to its website chatbot, despite an increase in applications.
It highlighted that investment in robotics was freeing-up underwriting staff to do more complex and value-added work.
Encroaching on brokers
Speaking at the launch of Dock 9’s digital transformation playbook, Kensington Mortgages digital transformation officer Vicki Harris, suggested brokers were likely to come under pressure.
“We almost exclusively distribute our products through mortgage brokers today,” she said.
“I suspect that going forward that will change, whether we start working with IFAs, or other banks or fintechs or go direct.
“Brokers are going to be there because people need advice, but they are going to have to change their role if they are going to think about how all these other players are going to start to encroach on them.”
She added that the lender was starting to think a bit differently about new distribution channels and how it segmented its customers.
Chatbot cuts calls
Harris also explained how the lender had seen smaller scale introductions of new technologies make significant impacts in the organisation.
The chatbot, which went live in July, has been for the substantial fall in broker phone calls, with Kensington monitoring the volume of interactions that it conducts.
“It basically allows brokers to ask a question and hopefully answers the question which saves them from having to call our telephone team,” she said.
“We are finding the number of applications we’re getting in are going up, but the number of calls going into that team has gone down by almost 25 per cent.
“We know how many questions it answers and we get people to tell us if they found it a good experience or not – and generally it is a good experience.
“So that is making a massive difference to us – 20 per cent freed-up time for the telephone team out to the brokers because they are getting answers automatically from the chatbot.”
Robotics adding value
Another investment came in the form of robotics which is being used quite extensively – particularly in the underwriting process.
“We are using robotics now to do Companies House searches or some sort of the basic things we need to do, which we are taking away from our underwriting teams so they can focus on value-added services,” Harris continued.
“Some of our links into valuations systems and processes are done through robotics.
“Each month now we are launching a new robotics process and its really helping our underwriting team to do more value-added work.”
Mortgage industry ‘has gone backward’ and is ‘years behind’ insurance technology
It is also the only sector to have gone backwards in the last 30 years with regard to the length of time it takes to complete a purchase, the audience at the launch of Dock 9’s digital transformation playbook heard.
Speaking at the event, Dock 9 managing director Mark Lusted said the mortgage market had a long way to go to catch up to similar financial services industries.
“Comparing it to the insurance world, it is years behind in terms of electronic passing of data, basic things like not having to re-key things into lender systems. It’s the basic stuff we need to get right first,” he said.
Only mortgages have gone backwards
This was echoed by Kensington Mortgages digital transformation officer, Vicki Harris, who noted that it was possible the mortgage process had got longer over the last 30 years when others had rapidly improved.
“In 1990 it took days to buy a flight, in 2017 it took minutes,” she said.
“For personal loans, in 1990 it took weeks, it now takes minutes. Insurance, in 1990 it took weeks, it now takes minutes. Mortgages – in 1990 it took weeks, it now takes months.
“It is the only sector that has gone backwards in the last 30 years. It is slow, offline, lags other sectors, and is desperately in need of some change.”
Ready for change
Harris suggested there were some key reasons for this stagnation, but added things were beginning to change.
“The high street banks are big, they have legacy systems, it’s very difficult to get anything changed,” she said.
“And then you get some of the smaller players who are starting to think about API (application programming interface) functionality, but historically not had it and not been able to do some of the things to address these issues.
“But the conditions are now in place for disruption,” she added.
This was echoed by Dock 9’s Lusted, who noted that things were changing.
“In 2019 we’ve started to see some real improvements and developments and things improving from a technology perspective,” he said.
“This year has really forced incumbent lenders and software providers to react and move forward.
“The industry is really starting to get its act together with APIs.”
Lusted added that barriers to entry for adopting new technology have become a lot lower and the momentum around the mortgage industry to truly adopt agile ways of working has really increased in pace this year.
“Those that do adopt these ways of working really see the benefits – 2019 is a tipping point in the sector and from 2020 we’re really going to see transformation in the sector.
“Our belief is that despite the noise and publicity around start-ups, fundamentally we’re in the age of the incumbents.
“So those incumbents that adapt and transform, have lots of advantages they are not leveraging or could potentially leverage, and those that embrace change will prevail,” he said.