I saw this on Twitter the other day which made me laugh…
My son has lived through four chancellors, three prime ministers,
three home secretaries and two monarchs. He’s five months old now.
Hopefully this made you smile… on a serious note however it is a good summary of why the past few months have been so volatile.
I am pleased to share that the mortgage market is a lot calmer (at the time of writing) and has become more stable since Rishi Sunak took office. Love him or loathe him, the markets have become more confident with his pledges to reduce Government debt.
So, what should you expect when you are coming to remortgage?
If you have a fixed rate mortgage product coming to an end over the next year or so, to be honest, you should expect a payment shock.
The Bank of England base rate has risen by 2.90% to 3.00% within the past 12 months and is expected to rise further.
It is normal for banks and building societies to borrow money to be able to facilitate lending. To explain this in simple terms – They go to the wholesaler, buy money in bulk, add a margin and then lend to mortgage customers.
Fixed rate mortgages are typically priced against SWAP rates (the rates at the wholesaler) which have been very volatile throughout the year but have become more stable in recent weeks. It may surprise you that SWAP rates for 2-year fixed rates dropped after the Bank of England increased the base rate by 0.75% on 3^rd November.
I thought it would be useful to share some predictions of what is expected to happen with the Bank of England base rate. To allow you to put the predictions into context, the Bank of England base rate is currently 3.00%.
Interest Rate Predictions
- Bank of England governor, Andrew Bailey said “we think the bank rate will have to go up by less than currently priced in financial markets (to around 4.5%)”
- Dankse Bank – “We keep the rest of our forecast intact, expecting the bank rate to peak at 3.75 per cent. We expect fewer hikes than priced in markets as we emphasise the weak growth outlook.”
- Royal London Asset Management senior economist, Melanie Baker said “Interest rate hikes, in an effort to lower inflation, are worsening the near-term economic outlook. The decision, forecast and minutes today are consistent with downside risk to my forecast peak for UK interest rates at 4.5 per cent.”
- Sanjay Raja, senior economist at Deutsche Bank agrees with this assessment.
- ING expects the rate to land just one percentage point higher than its current figure (to 4.00%)
When I remortgage, what type of product should I choose?
Roughly speaking, shorter term fixed rates are currently starting around 5.35%, longer term fixed rates around 5.10% and variable rate trackers around 3.70% (as of 11/11/22).
What is right for you will depend on personal circumstances, your attitude to mortgage rate risk and your objectives. Personally, if I needed to remortgage right now, I would choose a product that tracks the Bank of England base rate because the initial rate is lower and based upon the predictions there is a reasonable chance that the rate won’t reach the pricing of current fixed rates. This type of product also often doesn’t have any early redemption penalties which means it is flexible, allowing the potential to switch onto a fixed rate at any time. A variable rate product doesn’t come without its risks though, and for some they would feel very uncomfortable going for a variable rate when the Bank of England base rate is forecast to rise.
With the money markets currently pricing longer term fixed rates cheaper than shorter term fixed rates, it does suggest that in the mid term that rates may drop.
Someone with a moderate attitude to risk around mortgage interest rates may be better suited to a short-term fixed rate. For those that affordability is a challenge and/or have a cautious attitude to risk around mortgage interest rates, it may be best to go for a longer-term fixed rate, for example a 5-year fixed.
With any decision it is important that potential future changes are considered. We are here to help and will happily chat over your circumstance and objectives before researching the best product(s) for you. We can compare and show you in an easy to understand ‘Comparison Table’, tracker variable rates, shorter and longer-term fixed rates.
At the moment it is best to be chatting about 6 months before your product ends and with any research your adviser will consider your current lender.