These days, a decision to hold Bank Base Rate (BBR) at 5.25% feels like an incredibly big deal. Let alone a decision by the Monetary Policy Committee (MPC) to do this two meetings in a row.
As I write, the Bank of England has done just that, and while again this doesn’t necessarily feel like a point from which further rate rises are over, it does certainly feel closer to this, albeit with the significant caveat that much can change in the months ahead.
That being the case, and without a true line in the sand put down by the Bank, it’s clear that further BBR rises now don’t feel especially ‘locked in’, and if inflation does continue to drop as anticipated, then 5.25% could be the top of the interest rate mountain.
However, and this has to be respected by all market players particularly mortgage borrowers, we could all be standing at the 5.25% point for a fairly substantial length of time.
The Bank itself reiterated its own desire to keep rates high until it had reached its 2% inflation target and, despite those inflation fall predictions, this target might not be met until well until 2025. In that context, anyone counting on BBR being cut during 2024, might well want to recalibrate their expectations.
However, and this is certainly a point that anyone active in the mortgage market needs to get across to borrowers, a 5.25% BBR for a lengthy period of time does not mean that product rates will stay at their current status quo for the same time span.
This is clearly not the case because as we know, it’s not just BBR influencing mortgage product rates, and we’ve seen over the last few weeks in particular, that lenders are pricing their mortgages based on all manner of factors, and Base Rate is not necessarily the most important part of that decision-making process.
Hence, why we have the ‘best buy’ rates currently below Base Rate levels, particularly so for those who have higher levels of deposit/equity to put down, but also for those who may be considered to have the 5% minimum.
A quick look at the options available to low-deposit borrowers shows it is currently possibly to secure a five-year fix below BBR, while other fixed-term and discount options are not a million miles away from this level. We have not been able to say that too many times over the last 12 or so months, and this perhaps signals that lenders are actively looking for business, have the appetite to lend, and recognise they are going to need to be competitive in order to secure the business they require.
Which of course, is not to say that the current environment is a walk in the park, particularly for first-time buyers who are much more likely to need these high LTV mortgage products.
A higher-rate environment, even if they can secure those more competitively-priced mortgages, still creates issues, particularly in terms of meeting affordability criteria, and that’s without even factoring in those two historical obstacles, namely saving enough for a deposit in the first place, and being able to find an affordable home to purchase.
Supply-side problems continue to persist, which is why we had the most recent Nationwide house price index showing a fairly substantial 0.9% monthly increase in the average house price during October. Nothing really to do with activity levels, but far more to do with the fact that when there are slim pickings from a housing point of view, those homes that are available accrue a greater value, with potential purchasers willing to pay more in order to secure that home.
However, from a purely rate point of view, I would be surprised if lenders active in the higher LTV space – and those who may not be as active as they used to be – did not continue to inch pricing down further, through the rest of this year and into next. Particularly if, as I suspect, lending levels for 2023 are going to be considerably down on what was achievable last year.
I’ve also read few comments suggesting 2024 is likely to be much different, so it’s going to be imperative that lenders hit the ground running next year. That may well mean they are willing to cut their margins on higher LTV business, and for those who have yet to be involved in the sector, it may also mean they look to dip their toe into this market, because as we know, there is still a fairly strong demand for these lower deposit products.
Overall, my anticipation is that the direction of travel for high LTV mortgage rates in the weeks ahead will maintain its course southwards, and that BBR is unlikely to impact on that, especially if the decision to hold at 5.25% is maintained in the months ahead. A degree of stability here and lenders search for volume should see to that.
Patrick Bamford is head of international business development at Qualis Credit Risk, part of AmTrust International
