Pre-empt change and work ahead of the curve

The monthly delivery of the latest inflation figures has become increasingly important for all of us.

I would say even more important than the Bank of England’s Monetary Policy Committee’s base rate decision because inflation not only points the direction for what the MPC might do, but in the mortgage market, immediately determines where swap rates and the money markets are heading, and as we know, it is this (in the main) that determines mortgage product rates.

In terms of inflation, while I think we all knew there were different component parts of the figure we are presented with, I’m not so sure how much stock we placed in the difference between the headline rate, and ‘core inflation’, for example. Or indeed how much stock the markets/MPC placed in the latter figure over and above what the headline rate is.

That differential has however become ever clearer in recent months, especially as the headline rate has fallen, but the core figure – stripped of energy and food prices – has remained stubbornly high, and has seemingly determined the direction of travel for both swaps and the MPC.

Again, on the surface, the most recent headline inflation figure falling from 7.9% to 6.8% in July is good news, although we might all agree that it is still way above the Bank of England’s own 2% target, which appears out of reach by some margin.

But, dig down, and core inflation remains unchanged at 6.9%, which shows that while energy prices are coming down and are the reason why the headline rate has fallen, inflation in most other areas is seemingly not so malleable to change.

So, where does this leave us? Well, again, as pointed out above, core inflation either not falling or staying put has an immediate impact. Swap rates have already move upwards, and reading some of the analysis in recent days, there is now an expectation the Bank is likely to move BBR up to 6% probably by the end of the year.

Do we therefore believe the recent spate of mortgage product rate cuts, particularly by the big mortgage lenders, will stop straight away to be replaced by mortgage price rises?

Well, not necessarily, for a number of reasons. Firstly, we have to consider the time of year. As I write, we are mid-August – which of course tends to be quieter – but lenders are not thinking about now when they plan for pipeline and completions.

Business written now is unlikely to complete much before the end of the year, and if we are to take an average purchase completion time of 20-22 weeks, we are well into 2024 for these completions.

Lenders might well decide now/early Autumn is the prime time to be filling pipelines up, particularly in terms of both remortgage and product transfer business, and therefore even if swaps stay where they currently are and the MPC decides only to introduce one or two increases to BBR, we might well see mortgage product rates staying at their current levels in order to bring in the business required.

The other point to make here is of course around the lead-in time for remortgage/PT business in particular. With mortgage offers increasingly available six months out from the end of a deal, it makes perfect sense to both advisers and their borrowers to secure one now, and to continue to review the market in the lead up to the end of that deal, in the hope of securing potentially a better rate.

This will be the case across the board and for the foreseeable future. The message to borrowers is not to let the grass grow under their feet in terms of sorting out their remortgage, and lenders will be acutely aware of that. Stronger pricing now is likely to bring in the business they want and need, and of course it provides a strong degree of certainty to mortgage borrowers that they have something in the back pocket in the lead up to their existing deal ending.

We talk a lot about only being able to secure a mortgage at a given point in time, and that advisers can’t be fortune tellers, and that’s completely right. But the process of remortgaging or PT-ing, starts much earlier than it used to, and this does provide time to move to other deals should better ones become available between now and that point.

Certainly, from an advisory point of view, it makes sense for advisers to start this process early, to communicate with existing clients coming to the end of their deals, and to secure an offer now while telling the borrower they will continue to work on their behalf and review the market over the months ahead.

At the same time, you can work with the client on other services and product needs, such as protection, GI, conveyancing, and the like, to ensure everything is ready to go at that future point.

What we do know is that inflation will continue to shift and shape mortgage pricing. However we can’t know just how it will do this month-on-month – so pre-empt both positive and negative changes by working ahead of the curve and ensuring your client gets the most suitable product and best-priced one now, and they have the opportunity to secure alternatives which may be more beneficial if/when they become available.

Mark Snape is chief executive officer of Broker Conveyancing