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Blog: Stepping up to the challenge

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Kevin RobertsSince the chancellor’s ‘mini’ Budget last week, the breaking news stories have hardly stopped. Comments from the International Monetary Fund, and more notably an intervention from the Bank of England this week, show that there are real risks emerging for the mortgage market.

In such a volatile market it’s vital that information is communicated clearly and frequently between lenders, advisers and customers. While more change may well be on the way, it’s useful to take stock of the current situation as we approach the end of the month.

Mortgage availability

Within the last week, Swap rates have risen at a pace we were unprepared for. Rapid changes in such a short period of time are affecting the market significantly and are a major challenge for lenders, with corresponding knock-on effects elsewhere

These increases have led to almost hourly repricing and product withdrawals. While recent patterns suggest that lenders may re-enter the market with revised rates or products a few days later, uncertainty builds. And some lenders may remain out of the market for longer rather than re-enter only to have to pull product again shortly after.

We must not underestimate the impact of this on workloads and the stress for advisers and our customers. Many advisers have become desperate to lock in offers and deals before they’re withdrawn. Systems have been unable to keep up, causing further stress and disappointment.

In general, product availability has risen steadily post-Covid, Let’s hope that the current hiatus is a blip and we return quickly to these more positive trends.

The impact on rates

The increases to Swap rates have been eye catching. Only on Monday this week, customers with a 60% LTV could get rates of 3.39% for a five-year fixed product. By Wednesday evening, the best option available on L&G’s sourcing engine was 3.75%.

The recent long period of relative rate stability will mean these potential increases in mortgage payments will shock many who have calculated their outgoings at lower levels.

Rate rises this year have been dramatic when compared to recent years, though it’s important to note that the immediate impact has been limited, as a large majority of mortgages are fixed. This of course won’t last forever, and the rate shock for those coming off deals in the next few years may well be significant. Next year is set to be a bumper year for product maturities, amplifying this effect.

Reviewing the data from L&G’s SmartrFit tool, first-time buyers (FTBs) are already facing significant issues. The most common profile of FTBs – let’s call them ‘Mr and Mrs Average’ – is an employed couple, aged 32, requiring a loan size of £187,000 with income of £41,500.

With rates at 3.99%, their monthly income and expenditure, an average taken from all adviser inputs, are already at parity. For every 1% rise in interest rates, they will face a further £100 per month in interest payments. Even without the cost of living rises elsewhere, this couple now faces outgoings higher than their monthly income.

Staying Positive

There are some positive signs, though. Lenders are still seeing reducing levels of repossessions and mortgage defaults, unemployment remains low and mortgage stress-testing rules should also mean that affordability has been stressed at or above 7%.

Additionally, there are £76bn of products maturing in Q4 this year, and ongoing maturities will mean that the market will grow in 2023. From an adviser perspective, consumers will again need help as they face potentially eye-watering rate shocks.

Market outlook

Predicting house price movements is always a tricky game. Before last Friday, market sentiment was that house prices would remain stable next year. Now it’s less clear which direction the market will take, with many factors to account for.

One is the stamp duty changes announced by the chancellor, which are expected to maintain or improve buying momentum. Though since this relief also applies to second homes and buy-to-lets, and with the Help to Buy scheme ending, there is some concern that the government measures may proof limited.

Pushing against this will be potential falls in mortgage affordability among customers hit by the increase in the cost of living alongside the drops in product availability. There is also consumer sentiment to consider, which could be negatively impacted by headlines.

Coming together

Despite these emerging risks, the market has shown time and again that it can withstand periods of volatility and bounce back from setbacks. Just over two years ago all mortgage market activity was shut down by a pandemic that no one saw coming, but the industry rose to this challenge and the market emerged from lockdown in a healthy state.

Ultimately, the success of the mortgage market relies on trust between lenders, advisers and customers. We all benefit when we can find a way to work together. Understanding, patience, and clear communication will all be key to supporting the market through these latest challenges.

Kevin Roberts is managing director, mortgages services, Legal & General

Finopulse

Disclaimer: This story is auto-aggregated by a computer program and has not been created or edited by Finopulse.
Publisher: Kevin Roberts

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