Tomorrow all eyes will be on the outcome of the Bank of England’s Monetary Policy Committee (MPC) meeting – the first one of the year, and likely to be seen as a precursor for what the MPC might do during, at least, the first half of 2023.
The safe money is currently on the MPC voting to raise Bank Base Rate (BBR) by at least 0.25%, although there is some debate around what level the increase will be pitched at.
Certainly, from our perspective, a rise is inevitable but I suspect this is more likely to be 25 basis points, rather than 50, and there is also a much greater degree of uncertainty about whether the Committee will feel the need to raise again at its subsequent meetings.
A 25 basis points increase will take BBR up to 3.75%, and I’m more inclined to think this will be followed by a further increase of the same amount later. If it does decide to be more aggressive and move immediately to 4%, I expect that could be the last rise we see for some time.
Let’s be in no doubt that, with inflation still coming in at double-digit levels, the MPC will be acting again, and it will then hope that future monthly figures will see a sizeable drop, particularly if the predicted fall in energy costs does make its anticipated appearance.
What we can say is that over the last year, rate rises have become the norm, and given the MPC’s remit to get inflation down to its target of 2% as soon as possible, more are coming. That won’t however distract from just how difficult this will make the lives of mortgage borrowers, particularly those ’prisoners’ who can’t avoid their current lender’s SVR increases.
As you will know, the MPC voted to raise BBR at every single meeting last year and the last of 2021; indeed should it decide to raise rates again this month, it would be the 10th meeting in a row it has decided to do just that.
Now, we might well justifiably argue that any rate increases we see over the next couple of months are already ‘baked in’ when it comes to mortgage product pricing. Despite BBR having been raised in December, product pricing has largely fallen across pretty much all LTV levels in the residential space since then.
That has everything to do with the fact they were running considerably higher than BBR, largely in part, to the disastrous ‘Mini Budget’ and the vast rise in pricing this brought about.
Will we see lenders following a BBR increase with product rate increases? Well, of course, they will for discounts/trackers and SVRs, but I’m not so sure we will see fixes on the rise; in fact, it seems more likely that due to a combination of market competition and the need to secure business volume, lenders will continue to price downwards, particularly for longer-term fixed-rate products.
It may also mean a much healthier market for 2-year fixes if as anticipated, we are about to hit the ceiling for BBR, and – if, as seems likely – when inflation falls, the MPC is able to bring rates off their most recent highs.
However, in all of this, we shouldn’t forget the market has been seriously disturbed over the course of the last six months. Hundreds of thousands of borrowers coming to the end of their deals are going to be paying significantly more each month on their mortgage payments because rates have moved into a different ‘norm’.
BBR at 3.75% or 4% is going to mean a significant rate shock for many existing borrowers – unless you were on a hideously punitive rate, perhaps because of adverse credit, then virtually nobody is going to be remortgaging onto a better rate over the course of 2023. The effect of the ‘Mini Budget’ will go on for years, even if we have sailed into calmer waters since Truss/Kwarteng were ousted.
For advisers, what does this mean? Well, for a start, changes to BBR tend to ‘disturb’ mortgage borrowers – particularly those coming towards the end of deals and inevitably heading for higher monthly costs, and therefore advisers will be in demand.
What we will need to explain is that, for many borrowers, the notion of remortgaging in order to reduce monthly mortgage outgoings is now gone. about the focus will be on ensuring the monthly cost increase is as little as possible, and the safest way to achieve that outcome is by relying on independent, professional mortgage advice.
In years gone by, drifting (deliberately or accidentally) onto an SVR might not have been so financially damaging because rates were so low. Again, that phenomenon is over, and today’s mortgage choices are all about keeping any payment shock to a minimum, and without doubt, taking action.
For advisers, it is relatively good news. Consumers need advice but we will need to sign-post to them where to come, and we will need to ensure existing clients are not merely opting for the product transfer offer their existing lender will present when a fast-moving market could well provide them with far better options.
Whatever happens at future MPC meetings, advisers should use the headlines it generates to get your services in the shop window and in front of those borrowers who will be jolted by the cost hikes most will inevitably face. Right now, they need you more than ever.
Rob Clifford is chief executive of Stonebridge
