In the inaugural episode of Mortgage News Live, panellists confirmed that while brokers have had a busy start to the year, lenders could be feeling the rate war pinch.
Mortgage News Live is a new series that provides the latest industry updates, in partnership with MPowered Mortgages, Newspage and The Intermediary.
Chair Andrew Montlake, managing director at Coreco, asked panellists whether the ongoing and highly publicised rate war among lenders was really translating into strong business levels on the ground.
Emma Jones, managing director of complex credit-focused broker When the Bank Says No, said: “December was one of our second highest months for new business. Since the new year, we’ve not lifted our heads up once, we’re so busy.”
However, due to the brokerage’s more specialist remit, When the Bank Says No is “one of the luckier ones, not battling rate wars,” according to Jones.
Riz Malik, director of R3 Mortgage, agreed that there had been a welcome uptick in purchase enquiries.
He added: “I’m very optimistic about 2024, it’s going to make up for last year with rates and where swaps are at the moment – there’s a nice bit of calm we haven’t seen for a long time.”
Peter Stimson, head of product at MPowered Mortgages, said that for lenders there has also been “mad start to 2024,” pointing to the launch of products by Halifax as early as New Year’s Day, with others in the market following quickly.
MPowered itself has made updates to its products three times already in 2024.
However, Stimson said that outside of the top end of the market, lenders are not necessarily seeing solid volumes.
“You normally do have to be at the top of the market to see volume, but it has changed from that perspective,” he added. “We’re seeing volume, but it’s very price sensitive.”
Stimson said that rate competition had reached levels not seen since 2007, which is positive for brokers and consumers, but “not so great on the lender’s side.”
Understanding rate changes
With swap rates and geopolitical pressures increasing this pressure, Montlake noted that many lenders’ margins are thin at the moment.
With this in mind, he asked for clarity on what factors were influencing pricing, and why lenders sometimes pull rates at short notice.
Stimson cited swap rates and how much funding a lender has in place, adding specifically that in the decade between 2010 and 2021, rates changed very little, meaning that topping up funding was a relatively simple process for lenders.
This changed rapidly in recent years, particularly following the mini-Budget, leaving those lenders reliant on funding lines in chaos as a result of substantial swap rate movements.
“Suddenly all your profitability is gone, and you’re having to pull a product,” Stimson said.
He added: “It’s a perfect storm developing for lenders.”
While borrowers might enjoy rates dropping rapidly, Stimson said that this is equally difficult to manage in terms of pricing and hedging as when rates are going up.
Montlake suggested that some lenders have taken the approach of waiting for a tranche of borrowers to complete product transfers before releasing a new rate, causing frustration among consumers.
Stimson agreed that some lenders’ product release timings were “interesting,” and added: “There is sometimes a game that some lenders play between products being launched and products then pulling through on the pipeline.”
The panel suggested that – as is the case in some foreign markets – there might be space for a lender to emerge that allows for automatic switching if a lower rate emerges, reducing lender and broker workloads.
Money talks
Hitting on the subject of workloads, talk turned to procuration fees, particularly for product transfers.
Malik mooted the idea of a one-off fee for switching a product after an offer has been received, to account for the extra work involved.
“A product transfer can take just as much work as a standard remortgage, especially from a compliance point of view,” he added.
“Potentially halving what you’re earning has had an impact on a lot of us in 2023.”
Stimson agreed that there was likely an assumption among lenders that product transfers were less work.
Malik added that there needs to be an increase in transparency regarding pricing across the board from lenders, particularly when it comes to the difference between remortgage and product transfer.
He asked: “Why have we got lenders pitching [for new business] at certain levels, sometimes so different from what they’re offering their existing clients?”
Stimson answered that this was due to the appetite for volume in certain areas, the mix of the book, the fees lenders are paying out, processing costs, probability of default, loan-to-values, and importantly, risk weighting.
However, Jones noted that taking the approach that an existing customer is inherently lower risk might often be missing key details.
She said: “Ultimately if a client has had an adverse credit event, it makes sense for them to do a product transfer with their existing lender, and the lender has no idea of what that risk profile is, because they’re not credit scoring. They might have taken that mortgage out five years ago.”
Advising for uncertainty
The consensus being that inflation and rates, while optimistically on a downward trajectory, could turn at any moment – particularly when influenced by global uncertainty – talk turned to how brokers can advise clients.
Jones warned that some clients will see the raging competition and potentially think that waiting longer will mean even lower rates, but that this could be a dangerous false assumption.
Montlake said: “There’s never a good time to buy, and never a bad time to buy, it’s about what’s right and affordable for you at this moment in time.”
Jones said that one way to ensure clients take advice based on what is “best for today” was by relying in part on the message of switching products if the rate comes down before completion, even if this might create more work on the part of the broker and lender.
For Malik, this also came back to the point about fees.
He said that many clients would not have an issue with higher fees if they understood that their broker was taking responsibility for a complex and uncertain process.
“Part of this is about re-educating people about what’s involved in the process – it’s not just about pushing a button, it’s continuous monitoring,” he added.
“We probably don’t do enough as a community to inform people.”
Uncertainty has not only made brokers’ lives more complex, but Jones also points to the effects of Covid-19 and the cost-of-living crisis, which has grown the tranche of complex borrowers with credit blips.
2024 predictions
With widespread questions about the fate of house prices in 2024, Stimson said that supply issues have forestalled a lot of the predicted drops, and that prices would likely hold up quite well for the rest of the year.
However, he noted that when taken in the context of wage inflation, the smaller drops seen in house prices are in fact more dramatic from the buyer’s perspective.
Malik said the rate war would have a positive effect, bringing buyers back into the market and add momentum, particularly with BTL landlords sitting on cash reserves and waiting on the right moment to move.
This does, however, meaning a closing window of opportunity for first-time buyers to secure a favourable deal.
Jones said that as a result of these factors, 2024 would certainly be “a time to buy.”
In terms of other predictions, Malik said he expected “sweeteners” in the upcoming Budget, with the panel pointing in particular to a Stamp Duty holiday.
Looking further ahead, the Labour Party was the most recent to come out with talk of longer-term fixed rate mortgages, with some lenders already coming into this space.
However, Jones was sceptical about whether this model would work in the UK mortgage market.
In part, she pointed to the system of buying a starter home and moving up, but she also referenced first-time buyers having “career pathways” that would not fit with being locked into something long-term such as a 30-year fixed rate.
She said: “There are just so many variables. There’s a space for it, but do I think it could take over? Probably not, because of the way the UK market moves.”
Nevertheless, Stimson said this could be “the right product for the right client,” and confirmed that this was an area being considered by MPowered Mortgages, albeit “not a panacea for the whole market.”
Malik, however, said debate around longer terms was redundant in the face of the mass change of mindset that would be needed in order to make them work, concluding that the UK mortgage market would benefit more from investment in the idea of things like interest-only products.
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