Home LoanMortgage Market Watch: ‘Payment shock’ is back

Market Watch: ‘Payment shock’ is back

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Andrew MontlakeAnother month and another base rate rise. It has been a consistent period of increases in the past six months since the low point of just 0.1% in December last year.

Of course, this is not just a UK but a worldwide inflationary issue, which saw the US Federal Reserve increase its rates by a whopping 0.75% recently.

The Bank of England looks like it prefers regular, smaller rises to a couple of biggies and perhaps it’s too early to say which method is best. But it feels like death by a thousand cuts, and more rises seem likely.

Boris really does seem to pluck random ideas out of the air

Lenders, however, appear to be following the US approach and over the past week there have been some big increases; Barclays by as much as 0.76% to its 10-year fixed rates and 0.6% elsewhere. Rises of over 0.5% were mirrored by Accord, Halifax, Scottish Widows and TSB, with others not far behind.

Borrowers these days really cannot afford to procrastinate for a second. Nor can brokers, for that matter!

For those who are looking at remortgaging right now (which includes me), they are seeing the return of the term ‘payment shock’ — which some older brokers (me again) will remember — as they come off lower fixed rates into a market priced around 1% to 1.5% higher than they were paying. It caused me to let out an audible wail of anguish when I worked out the new monthly payments.

Using benefits, especially housing benefit or Universal Credit, is not an ideal base for a mortgage

All of this exacerbates the cost-of-living crisis that is really starting to squeeze household finances as higher mortgage payments join rising energy, food and fuel costs.

Impact on house prices

At some stage this should start to affect house prices and I expect the pace of growth to fall back over the coming months. That said, demand is still there for now and successive governments’ failure to make a dent in the supply of good-quality, affordable housing remains an issue.

One interesting stat, according to Halifax, was that during the first quarter (Q1) of 2022 the average price of a home in the UK was £279,431 while the average salary was £39,402. This put the house-price-to-income ratio at 7:1 — the highest, or least affordable, on record.

We have seen a relaxation of the stress-test rules, although Mortgage Conduct of Business rules on affordability remain in place

Sticking with housing, it was interesting, or a better word would be ‘bemusing’, to hear of the government’s latest plans. Forgive the sense of exasperation as we hear many people in the housing market look to the heavens and say, ‘Here we go again,” but Boris really does seem to pluck random ideas out of the air and is so desperate to be seen as the new Mrs Thatcher that I wouldn’t be surprised to see him doing his next interview clutching one of her trademark handbags.

It all smacks of more than a little desperation to convert a whole swathe of people to become Conservative voters, without really making much sense or getting to the root of the issue.

The benefits plan is strange. Using benefits, especially housing benefit or Universal Credit, is not an ideal base for a mortgage and, even if it is used, it is unlikely to boost borrowing eligibility enough to make a big difference.

The Bank of England looks like it prefers regular, smaller rises to a couple of biggies but it feels like death by a thousand cuts

Also, there is a question mark around eligibility that could change through the borrower’s circumstances, or changes in policy around who is eligible. In fact, if they have enough savings for a deposit, will that negate the need for the benefit? I think this one will simply be ignored and quietly disappear.

As far as the new Right to Buy is concerned, it may help some but it is a bold claim that every house sold will be replaced by another to ensure social housing does not reduce further. Given that governments and housebuilding targets don’t seem to mix, this is a big ask. As an example, the number of new homes completed in Q1 2022 compared to Q4 2021 fell by more than 10%.

Market review

Also, the need for another review of the mortgage market, to see if deposits can be reduced further, borders on farcical in a sector that already works very well. All these schemes seem to be demand sided, which keeps the prices of property high without addressing the supply-side issues.

The government would be better off nationalising a housebuilder and building its own affordable housing in places people wanted to live, or creating new places complete with infrastructure.

It caused me to let out an audible wail of anguish when I worked out my new monthly payments

To encourage more building, Homes England has launched a Help to Build Equity Loan scheme, which aims to help people self-build or custom-build their own home with a 5% deposit. Self- and custom-builders will have three years to build their home.

We have seen a relaxation of the stress-test rules, although Mortgage Conduct of Business rules on affordability remain in place, which may help some borrowers and is welcomed. It will be interesting to see if lenders change here or, because of the rise in rates and the cost of living, decide to keep things roughly the same.

Of course, this is not just a UK but a worldwide inflationary issue

In the money markets, three-month Sonia has gone supersonic and is drinking gin and tonic, streaking up 0.85% at 2.26%. Swap rates have downed a Jäger Bomb to catch up.

Since the previous column:

2-year money is up 0.26% at 2.53%

3-year money is up 0.43% at 2.70%

5-year money is up 0.39% at 2.58%

10-year money is up 0.40% at 2.44%

In the world of the mortgage lender, apart from rates changing there is not an awful lot to report. Even if I did, it would be out of date instantly.

What is quite interesting is the return of the discounted-rate mortgage, which had retreated to the shadows. Accord is the latest to launch a range for residential and buy-to-let (BTL) borrowers.

Lenders appear to be following the US approach and over the past week there have been some big increases

HSBC and Barclays have improved their product transfer process, which is jolly decent, while TSB has clarified all the conditions upon which it will lend to someone on a visa.

Following the green agenda and the changes to BTL properties, The Mortgage Works has stated that a valuation will not be instructed until it is in receipt of a valid energy performance certificate (EPC). Meanwhile, Pepper Money is offering all landlords who borrow in their personal name a free energy efficiency survey, EPC certificate and tailored action plan.

Another month and another base rate rise

Finally, to echo OneSavings Bank’s Adrian Moloney: in difficult conditions it is the relationships between brokers and lenders that need to stay strong. Neither functions without the other and communication is key. We pull through when times are tricky and this will be no exception.

Walk in peace, my friends.

Hero to Zero

More than 400 firms have signed the Women in Finance Charter

The new Building Safety Act that will provide some financial protection to leaseholders in high-rise blocks

Withdrawal of the current additional stress test

The relentless speed of rate pulls and changes – please do your best to give brokers notice

Companies being very un-green!

War and inflation and all the crap that goes with them…

What Really Grinds My Gears?

The green agenda is a big challenge for us all. We know that current ‘green’ products are just greenwashing, and we require proper collaboration and innovation on this. We must produce some new, innovative products that meet the real needs of future borrowers.

Let’s face it, we have had the same product set for 30 years. We need a set of lifestyle products that offer competitiveness and flexibility, and adapt as a consumer’s life changes.

Maybe an offset tracker that is capped and collared, with minimal penalties, or able to be changed via windows or due to life events. One that is automatically portable and even builds in an automatic allowable increase to a certain level. Fanciful, maybe?

Current ‘green’ products are just greenwashing. We must produce some new, innovative products

Anyway, being green is of course not just about products. Lenders and insurers, please stop sending us things in the post — offers, terms, updates, etcetera.

What a waste! Most of us aren’t even there now to receive them and we just get a pile of post that goes straight into recycling.

And then there are marketing departments. Please think about your marketing; it should all be environmentally friendly, and I have received a couple of extraordinarily wasteful things recently that just made me angry!

Businesses, look at yourselves. Employees, you are the future of our industry. What pressure are you putting on your companies?

We all need to be carbon neutral or negative.

This article featured in the July edition of MS.

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

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