It is organised chaos in the mortgage market at the moment as lenders respond to the now monthly increases to Bank Base Rate.
While base rate is not linked directly to fixed term deal pricing, it might as well be in our current economic climate.
Simply because the Bank’s MPC is reacting to monthly inflationary figures which for May, (CPI) stayed at 8.7%.
For the period that inflation isn’t responding positively to base rate rises, financial markets will continue to respond negatively, and gilts will continue to rise.
At the time of writing, 2-year gilts were at 5.247%. To give some context, they were at 1.997% this time last year.
As gilt yields continue to rise, so will swap rates which largely determine the pricing of fixed term mortgage deals.
Again, at the time of writing 2-year SONIA swap rates were 5.711%. At the same time in May they were 5.082% and in June last year, 2.736%.
So, it is easy to understand why lenders are pulling fixed term products with little or no notice and repricing upwards. They simply don’t have a choice!
Lenders need to consider mortgage brokers
Lenders could though, I believe, manage the process with more sensitivity and understanding of the brokers situation. It is the broker who is trying to navigate through and find the best possible outcome for their clients.
Serving product withdrawals with no notice period has placed unnecessary and unwanted pressures on mortgage brokers.
Being a mortgage broker is a highly stressful job at the best of times as they are dealing with clients during a period of emotional upheaval in their lives.
Current market conditions are only adding to this pressure as many clients are also experiencing a significant ‘rate shock’.
Whilst I have some sympathy with the commercial pressure lenders are facing from the volatile money markets, and I also recognise the service risks a lender could face if left exposed with a product, some minimum market standards must be created so that brokers have time to get their applications submitted before deadlines strike.
Crucially this enables client expectations to be managed. Crystal Specialist Finance are a founding member of the Mortgage Industry Mental Health Charter (MIMHC) which aims to create a framework in our industry to better support wellbeing, and we are currently working with lender signatories of our Charter to establish such standards.
The approach of lenders is currently creating chaos for mortgage brokers and distributors who are trying to place mortgages for their clients.
Pipelines are increasingly destroyed overnight as lending criteria and pricing changes affect affordability, ICRs and stress tests; often the whole financing process has to restart.
The end isn’t yet in sight
When does it all end? I think the bad news is not this year. While inflation will start to fall in the coming months it will not be at the Bank of England’s forecast and so base rate will continue to rise.
Once we get into the realms of a base rate of over 5.5%, we are in automatic recession territory and then inflation will fall sharply. 6% is a distinct possibility.
As Robin Day put to John Major in 1992, “Some commentators do say that any fool can get inflation down if you are prepared to lay the economy on its back.”
The Chancellor of the Exchequer has said several times that if recession is the tool that curbs inflation, then so be it.
Unfortunately, that is where I believe we are headed – recession to kill inflation.
Recession to reduce interest rates. It feels like an inevitable reset as current policy isn’t working and won’t until that tipping point is reached.
Where does that leave mortgage advisers who are simply trying to find the best outcomes for their clients?
They firstly need to have a good understanding of what has caused this situation so that they can explain it in plain English to their clients. Especially for clients coming off 1%ish fixed term deals who will be struggling to understand what is happening.
It isn’t the client’s fault, the brokers, or the lenders. Where you want to point a finger (or a fist) I will leave to your political persuasion.
Mortgage brokers can relieve the pressure
Here are five tips I believe that brokers can use to minimise the impact and make their lives just a little bit easier:
Work with an expert. While you may think that I would inevitably suggest this, experience tells me that brokers should always work alongside a specialist distributor who act as an extension to the brokers own business structure. A good 3rd party relationship should enable brokers to focus on growing their sales and allow them to best support their clients’ holistic needs.
The broker usually has the option to either refer their business and let the distributor manage the whole sourcing, placement and operational process or allow them to act as a packager where the broker will maintain advice responsibility and a large element of the client interaction through the funding journey.
Go digital. While some lenders aren’t winning any prizes for their application portals at the moment, the same isn’t true for the distributors. At Crystal, the quickest way for brokers to submit their cases is through our digital HUB system.
It’s a quick process and crucially brokers can book their appointment with an underwriter at the same time. Getting applications into lenders as soon as possible has never been more important.
Move quickly. Don’t delay in gathering the required paperwork. Supplying checklist information in one go has arguably never been so needed. This task completion enables distributors to skilfully package your case, so it is presented in the best possible light and importantly satisfies the very tightest criterias – first time every time.
This builds valuable good will and enables the broker to consistently secure the best rates and best criteria available at that time.
Take advantage of express underwriting services. Some distributors like Crystal, offer ‘fast track’ services enabling brokers to talk through their case with an underwriter on the same day and if the broker has the documents ready, it can be packaged and submitted to the lender on the same day – securing the best deal for the client.
Explore the alternatives. While 97% of residential mortgages are fixed terms, there are other product options for brokers to explore. Bridging finance is growing in popularity every day with costs very close to fixed term alternatives – especially for buy to let. Plus, bridging finance offers a host of flexible features – such as the availability for adverse clients and repayments without penalty.
The mortgage market is obviously experiencing difficult and challenging times, but the need for property finance never stops.
There are more than 2.4 million homeowners on fixed term deals that are due to expire between now and the end of 2024 according to UK Finance.
The rental market is booming, and property investors are looking to expand.
Professional investors are looking to semi commercial spaces to improve their yields.
There will always be a strong demand for property finance and the real and short-term challenge is how can brokers, distributors and lenders work better together, maybe utilising digital technology to see this storm through.
Our sector has demonstrated amazing resilience during previous adverse cycles and no matter what is thrown at us we should remain optimistic about the future.
Jo Breeden is managing director of Crystal Specialist Finance
