How to Get Away With Just a Mild Case of Mortgage Pain

How to Get Away With Just a Mild Case of Mortgage Pain


That was the most positive comment I heard when speaking with UK mortgage specialists this week. The recent gilt market turmoil has made securing real-estate financing a high-wire act.

One of the biggest British lenders, NatWest Plc, actually raised lending rates for its most popular mortgages in the midst of new Chancellor of the Exchequer Jeremy Hunt’s first address to the House of Commons on Monday. It doesn’t take much for risk managers to sound the alarm when interest rates are rising as sharply as they have in the past two months. Most mortgage offers are binding for up to six months, so it’s understandable that lenders are withdrawing the most attractive deals and waiting until the dust has settled before competing proactively again.

Ten-year gilt yields have more than doubled to around 4% now since mid-August. Until Hunt dumped his predecessor’s tax plans, yields had been even higher. The interbank swap market, the benchmark for banks’ fixed-rate deal funding costs, is at about 5% for one- to five year maturities. 

Most mortgage offerings are now above 6% at first glance. A year ago it was possible, for a brief window, to secure a five-year fixed rate as low as 1%, but base rates were at just 0.1%. Those days are long gone, probably forever. Now, many offers are deliberately priced unattractively to avoid business, so it is advisable not to read too much into averages, or scary media stories for that matter. 

But prospective homebuyers rarely ask for an average deal. They want the lowest competitive rate available. And it’s still possible (via a well-known lender like Nationwide Building Society) to secure a five-year fixed deal with a 85% loan-to-value at 5.39%, according to Peter Tsouroulla, head of mortgages at Trinity Lifetime Partners, a financial-advisory firm in London. This rate improves to 5.19% for an even longer fixed-term of 10 years (based on a 25-year lifetime mortgage).

But things will eventually calm down.

The real trick, if you can handle a bit more heat from higher interest rates, seems to be opting for a tracker mortgage. These are tied to the Bank of England’s base rate (likely to rise to at least 3% on Nov. 3) with a 0.75 to 1.25% credit premium on top. NatWest and Barclays Plc are both offering two-year trackers at 3% (this will rise in line with base rates). All mortgages revert to lenders’ standard variable rates once the fixed-or teaser rate term ends. As these are usually substantially higher than promoted fixed-rate deals, most are immediately refinanced.

In times of stress, like now, it can become next to impossible to secure borrowing if there are unusual complications, such as a small down-payment, poor credit history or irregular employment. Similarly, with annually set rental prices often lagging behind the cost of mortgages, the buy-to-let market has become more illiquid as lenders back away from potentially riskier loans to landlords. With tighter regulations on removing tenants, it has become harder to swiftly secure the underlying collateral. Lenders are notoriously pro-cyclical in their fears, reducing the flow of capital in tough times, and usually overdoing it in boom periods. So it pays to wait if you can bide your time.

Although official interest rates have likely not reached their peak, sterling money markets have already effectively priced in much higher levels of about 4.5%, and mortgage lenders have factored this all in. In fact, UK rate expectations are above where most economists think they will eventually peak around 4% and should start coming down by 2024. 

Naturally, mortgage providers value existing customers with a decent track record; so new borrowers and first-time buyers can find it more expensive than homeowners re-mortgaging. But eventually greed will overcome fear again, when volatility subsides in the money markets. Patience is a virtue if you wish to secure a better financing deal for a roof over your head. 

More From Bloomberg Opinion:

• Truss Squanders Thatcher Legacy With Homeowners: Therese Raphael

• UK Rental Market Is Broken But Not Beyond Repair: Stuart Trow

• Buying a House Now Wouldn’t Be a Bad Idea: Teresa Ghilarducci

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Previously, he was chief markets strategist for Haitong Securities in London.

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