Some lenders have already started preparing for this by raising rates on low loan to value (LTV) mortgages and previous sub-one per cent offerings to increase margins.
In light of this, the Office for Budget Responsibility also predicted mortgage costs could increase by 13 per cent by 2023.
So this week, Mortgage Solutions is asking: Have client attitudes changed in light of discussions around rising mortgage costs and rates? How are you adjusting your business strategy to prepare clients?
John Phillips, national operations director at Just Mortgages
There’s still a healthy number of people looking to move, and a wave of remortgages coming in the next few months.
The rate rises also need to be taken in context, but while we may not have the sub-one per cent products, rates are unlikely to rise significantly.
While brokers will discuss with clients the option of long-term fixed rate products, most clients are comfortable with a five-year fixed product. Anything beyond five years can be difficult to predict, as personal circumstances can change a lot in that time.
Clients may be attracted to the lower rates of a two-year fixed product, but with the forecast rate rises in 2023, most will be better off in the long-term with a five-year fixed.
As always, understanding the client’s needs, beyond just financial circumstance, is the key for brokers. There will be some that should fix for two years as they are potentially starting a family and will want to move soon, but there are plenty of others that should fix for longer.
All the Just Mortgages brokers will be having conversations with clients about their financial future, and the potential rate rises will be part of these discussions.
Good brokers are always looking into the future, and while we can never be totally certain of what it will hold, it is relatively clear that rates won’t drop lower than they are now in the next few years.
Fixing for five years is certainly a popular decision at the moment, but brokers should always take into account a client’s needs, and never push for a product that’s unsuitable.
Dominik Lipnicki, managing director of Your Mortgage Decisions
We are seeing more urgency for clients to get a great fixed deal now with many thinking that with the recent increases, this may be as good as it gets.
We are also seeing more borrowers look at longer term schemes, rather than just being driven by monthly cost.
The key here is that the Bank of England will not want to do anything that spins the economy into a recession, hence any increases will be measured and low. Even a swift return to the pre-pandemic base rate of 0.75 per cent would still mean very low rates for most.
It has also changed the mindset of clients who were considering tracker rates or staying on a deal to avoid early repayment charges (ERCs).
Some are now making that calculation to see if it is worth paying an ERC and locking into a deal, particularly those who believe that rates may well be at three per cent or more in the medium term. Clearly paying an ERC to secure a new fixed rate requires some very serious thinking.
We are raising the topic of potential rises in costs, as this is key. This means ensuring that clients can afford the mortgage now but also if rates increase in the future.
Stress rates already cover any potential increases, but we may well see that change if the sort of low rates that we have been used to over the last 13 years are no longer around.
James McGregor, director of Mesa Financial
With regards to the business strategy, we have not made too many changes.
Advice is determined by clients’ personal circumstances, including potential base rate changes. With regards to our clients, now is the time for us to be as proactive as possible.
It is key to be in constant contact with our existing clients to make sure they are getting the best possible rates for their personal situations. It is also crucial that we educate them about how these market changes normally operate and not to only consider the increase in base rate.
Most people in the market will currently be on fixed rates and won’t be in a position to act right now. Only a small percentage of the market sit on tracker products.
People have always been interested in fixing in for a long time. As an adviser, it is our job to make sure people are aware of the consequences that these decisions can have.
We have found some lenders tempting people with cheaper, long-term fixed rates, but they come with huge early repayment charges that are fixed throughout the full rate. A significant proportion of these people would be forced to break their mortgage.
For those considering tracker rates, if anything, these have actually now fallen in line to where they should be in the market so they are more attractive.
To be honest, when there is an increase in rate, we believe it will be quite nominal and may not even bring us back to pre-pandemic levels initially. Even when the base rate was at 0.75 per cent, there were still mortgage interest rates at 0.99 per cent.
Based on these numbers, interest rates have been high when you consider the banks’ cost of funds since the base rate reduced to 0.10 per cent. But lenders will always reduce their margin when they want market share.
