Despite unprecedented measures from the Bank of England to keep mortgage rates low, a price rise may be on the horizon. Currently, mortgage rates are still at historic lows, but they may soon rise as the huge surge in demand from borrowers seeking loans after the recent stamp duty cut continues. Mortgage broker Private Finance says this may lead to banks pushing up rates to stem the flow of applications, increasing the rates to dampen demands.
The coronavirus lockdown has had an impact on many households’ finances. Brokers say a ‘perfect storm’ of issues, including millions facing redundancy, has put the bankers’ brakes on, as lenders have become more cautious about who they lend to. This, coupled with a cocktail of uncertainty about the future of house prices,has led to a rift in the market.
But is this alone enough to push up the cost of buying a property in the UK, and what other factors are involved? We take a look at what determines mortgage rates and whether an imminent rise is likely.
The Big Cut
During lockdown, banks and building societies cut a staggering number of deals. Staffing shortages and the majority of the country working from home, led banks unable to keep up with demand.
With millions facing redundancy, a tidal wave of customers requesting mortgage holidays occured. Which created its own set of problems; when the mortgage holiday was first introduced many borrowers found themselves waiting on the phone for 10 hours or more before being able to talk to somebody.
The good news is that lenders will have more of a handle on their staffing issues now, compared to the opening months of lockdown, but they are still working at a much lower capacity than they once were and with branches still closed almost everything now needs to be done online or over the phone.
Another factor that may push up rates is a dwindling appetite from lenders to take on borrowers who they see as more of a risk. As a result of staffing problems at banks and building societies, lower deposit mortgage deals are most at risk of being cut. Lower deposit mortgages usually take more work to underwrite, as they present a higher risk to the lender.
Banks and lenders may also see a shrinking economy where job losses are likely as a good time to put up mortgage rates to cover themselves if borrowers go into arrears. If they see lending as more risky in general in an ailing economy, this could mean rates will rise.
However, in a U turn from being extremely cautious during the initial Covid outbreak, experts claim lenders are now more relaxed. It is worth noting though that measures introduced during lockdown, including harsher credit scornings, are still in place and likely to remain for some time.
Broker Private Finance’s Chris Sykes said:
‘The stamp duty changes really have spurred on a tsunami of business and lenders and brokers are struggling to deal with the level of demand we are seeing at the moment. Many home buyers have bought forward plans by many years with the prospect of saving themselves up to £15,000 being extremely attractive. Employees are still working from home and lenders are feeding back that unlike many industries there is a decrease in efficiency. On top of this valuers in many cases are still on furlough or unable to work due to childcare.’
Sykes said that due to this it is taking an ‘extremely long’ time to process mortgages, adding that lenders are increasing rates to manage the flow of applications as a result.
Chris Sykes, Private Finance
How have rates moved this month?
Despite some light being shed on the horizon, data from financial experts at Moneyfacts and Private Finance warns of an impending rate rise. While rates on the low risk five-year 60 per cent loan-to-value deals haven’t moved since the start of the month, some of the riskier deals have crept up. Two year fixed rates for those with a 10 per cent deposit, have risen, along with both two-year and five-year deals for those with a 20 or 30 per cent deposit. Positively however, swap rates seem to have levelled out, which traditionally set the cost of the fixed rate mortgage. Generally, a rise in swap rates will push up mortgage costs for the lender and therefore borrower. A fall in swap rates allows lenders to offer cheaper mortgages.
Eleanor Williams, finance expert at Moneyfacts, expects rates to rise in the coming months: ‘With reports that bank profits may be falling and providers needing to set more funds aside for further coronavirus planning and potential defaults, this could signal the end of the historic low mortgage rates of recent months. Therefore, those looking to secure a new deal now may wish to move swiftly.
‘The role of an experienced, independent adviser has never been more pivotal in ensuring borrowers are able to make an educated choice about the right product.’
Elenor Williams, Moneyfacts.
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