Recently, I was pleased to take part in a Masterclass event in London with a room full of journalists, where I talked about how lenders price their mortgages.
At first glance, this might be a topic that seems straightforward – but the fact is, it’s more involved than it seems.
The Bank of England base rate changed again recently – bringing this topic back to the fore – the main theme of conversation being that if the Bank Base Rate has reduced, mortgage rates should reduce too.
News articles often tell the same story – asking questions as to why, for example, Base Rate has gone down, but mortgage rates have increased; or Base Rate has stayed the same, but mortgage rates have increased – both headlines I’ve seen in the recent past.
However, there’s more to funding mortgage rates than meets the eye. If we look at the types of mortgages available in the market, only tracker mortgages are directly linked to any base rate changes – but these only make up a small percentage of mortgages. The rest of the market is largely comprised of fixed rate products (roughly 75%), with the remainder being variable rate mortgages, and fixed rates are linked to swap rates – which are much more volatile than the base rate.
Inside the world of funding
Lenders fund their mortgages in two main ways – ‘retail’ and ‘wholesale’. Examples of retail funding includes deposits from savers – including savings products such as fixed rate bonds and ISAs, or cash in current accounts. Wholesale funding includes secured and unsecured borrowing from financial institutions such as banks, insurers and asset managers, using assets as collateral.
Swap rates – which are the foundation of mortgage pricing – are predictors of where the market is going to go in the future, and they directly impact funding costs. They are volatile,
and affected significantly by outside pressures such as economic factors like inflation, as well as global and political events. If the expectation is that base rate will stay higher for longer, swap rates will increase, so fixed mortgage rates also increase. When a major world event takes place – such as Trump becoming President of the USA, imposing tariffs – or events like the Ukraine war or conflict in the Middle East – it impacts swap rates because the market is speculating on the impacts of the event on the base rate in the future.
A unique difference
Accord Mortgages is very proud to be the intermediary-lending arm of Yorkshire Building Society, with its 160-year history of helping people to find a place to call home. And much of our funding comes from members’ savings, but being part of a mutual means that we have no external shareholders, so profits can be reinvested in the business. This allows us to improve our products, technology, systems and processes, and also to focus on our underwriting and sales teams and how they can maximise the value they add for brokers and their clients.
This helps us react quickly to what the market needs with more flexibility. For example, just recently, we’ve updated our affordability model, lowering stress rates to help lend more to more borrowers, and launched a first-time buyer cashback product range offering up to £6,250 cashback for them to use towards the increased costs associated with buying, including higher stamp duty costs. We continue to look for new ways of applying the common-sense approach we’re known for to help more borrowers, wherever we can – because we understand that when choosing a lender, it goes far beyond rate.
However, the beauty of the market is that each lender is unique – with different pricing strategies, products, and propositions – but we’re all here to support our brokers and their clients, whatever their individual circumstances, and whatever the economic, global or political landscape throws our way in the future.
Chris Hill is head of sales for Accord Mortgages
