Market News

Chris Sykes admits he has spent one too many late nights glued to the screens in his lounge-turned-home office in east London.

Efforts to secure favourable mortgages have resulted in considerable overtime for mortgage brokers like Sykes, who has been chasing a dwindling number of low-rate deals for clients this year.

Lenders have been cutting low-rate deals in response to nine months of consecutive interest rate rises by the Bank of England, where policymakers have been trying to get surging inflation – a ripple effect of the war in Ukraine – under control.

This is putting further pressure on brokers who say they are increasingly getting mere hours’ notice before lenders raise their own mortgage rates. “It’s been incredibly tough,” Sykes said. “I’ve generally been just head down, on the computer, and cracking on through applications.”

Personally, I haven’t seen rates rise this rapidly before
Chris Sykes, Private Finance

It also means managing client expectations. Most of the 1.2% offers that would have been considered a good deal last year have disappeared, Sykes, who works for the broker Private Finance, said. Instead, some clients are lucky to get their hands on mortgages with a 3% rate, more than double last year’s favourable rate.

“Personally, I haven’t seen rates rise this rapidly before,” Sykes said.

Bank of England data released earlier this month showed UK mortgage rates rose by 46 basis points to 1.95% between November and May, marking the fastest half-year rise since 2012.

Meanwhile, the average two-year fixed rate mortgage worth 75% of the cost of a home jumped from 1.2% to 2.63% over the eight months to May, in the fastest increase over that time period since records began in 1995.

And with inflation now at 9.4% – far above the UK’s 2% target – markets are pricing in another rate rise in August that could push mortgage rates even higher. “Changes that we’ve seen from lenders across the market have been relentless, and there’s no sign of that slowing up,” David Hollingworth of the broker L&C Mortgages said.

Changes that we’ve seen from lenders across the market have been relentless
David Hollingworth, L&C Mortgages

But even brokers say banks – which have been raising mortgage rates at pace – are not to blame. “Lenders do have a difficult job,” Nicholas Mendes of the mortgage broker John Charcol said, acknowledging that the mortgage application frenzy has left many banks struggling to keep up with demand.

“Given how quickly things change, they can become market-leading and be overwhelmed if they price incorrectly.”

Banks have three options, he said: offer mortgage deals that are uncompetitive in order to avoid being overrun by applications, reprice at short notice, or pull out of the market completely.

Mendes is now advising borrowers to consider longer-term fixed rates, lasting 10, 15 or even 30 years, to avoid paying more due to future rate rises that are expected to continue into 2023. “The continued risks mentioned will undoubtably mean we are likely to see further increases to the cost of a mortgage,” he said.

And although rising rates would usually be good news for UK banks, since they are able to charge borrowers more for their home loans and ultimately increase their net interest margins – a key measure of profitability and growth – the weaker economic outlook is likely to overshadow any extra income from their mortgage books.

UK lenders including Barclays, Lloyds, NatWest and HSBC will start revealing their second quarter earnings from Wednesday, and are expected to report that their profits capped by impairments, including the amount of money they must put aside for potential defaults.

“We expect to hear positive soundings from UK bank management teams on the interest revenue outlook given the evolution in expectations for rising base rates,” said John Cronin, a financial analyst at the stockbroker Goodbody.

“However, a central focus of investors will be on the outlook for rising impairments in the context of the weakening economic backdrop,” he warned. That weaker outlook is partly due to the surge in inflation, with higher energy and food bills eating into borrowers’ income.

Cronin explained that those impairments will “overshadow” the improved interest revenue outlook. “Everyone is grappling with how it will evolve over the coming quarters,” he added.

It is actually very difficult to make house prices go down, and if they do, they recover in time
Iain McKenzie, Guild of Property Professionals

Meanwhile, potential borrowers who have been waiting for house prices to cool on the back of inflation and rising interest rates may be disappointed.

Iain McKenzie, the chief executive of the Guild of Property Professionals, pointed to data that showed house prices only declined during 16 out of 90 years since 1931, including over the second world war and the global financial crisis, when prices tumbled by about 19%.

“When you look at historical house price data, you will see that it is actually very difficult to make house prices go down, and if they do, they recover in time,” McKenzie said.

Despite the cost of living squeeze, rate rises and weaker economic outlook, average UK house prices reached a new record of £271,613 in June, according to the Nationwide building society.

McKenzie said there might be a slowdown in the rate of price increases compared with the past two years, but that lack of supply is still underpinning prices. “I believe the housing market will remain robust and we won’t see the kind of correction in the market that many are expecting,” he said.