Mortgage Market Update
Interest rate now at its highest level since 2008
Interestingly, only six of committee members voted in favour of the .5 percent increase and two of them voted for a .75% increase and one member voted to stay at 3%. This really shows how much they’re potentially wanting the rates to increase, the main reason why they’re doing this is to bring inflation down.
There are some reports that inflation is slowing, which is positive news for them, they don’t want to overshoot the mark and increase rates too much, but ultimately, it does look like we’re going to go into recession now in Q3. The market did contract .3% and potentially is looking like it’s going to contract again in Q4 – If that’s the case, then technically we will be in a recession.
Previously they were suggesting that the base rate might go up to 6%, but now they’re forecasting it to go up to around four and a half percent. This is ultimately just predictions; it could be lower or could be higher than that. This is worth knowing what that could mean for yourself as a property investor.
So, what’s been happening in the market recently? it’s certainly been a turbulent couple of months thrown out of the back of the mini budget rug pulled the lenders and the markets didn’t like that. The cost of borrowing increased and because of that, the lenders had to remove all their products, reprice them and bring back new products that were much higher than they were previously.
It’s certainly been an eventful couple of months.
The good news is that the market has settled, and the current trend is that we’re seeing rates starting to reduce with the majority of lenders. Before this we were getting updates daily about rates abruptly increasing. Now we the opposite, even today off the back of the news with the base rate increasing.
Lenders have continued updating us, saying that they’re reduce rates. Overall, definitely a positive for borrowers. Product availability, that’s been a worry for some and it was an issue a couple of months ago. But all the lenders are back to lending pretty much at full capacity. There is still a couple lenders that are not offering their full mortgage product suite, but most of lenders are now back to lending 100% capacity.
One of the issues we’ve had off the back of these interest rate increases is the mortgage stress test for buy to lets (BTL) mortgages. BTL mortgage stress tests are basically where the lender needs to see that the property will cover the mortgage payments, not just at today’s rates, but potential future higher interest rates and taking into account a coverage ratio for any void periods, tax and any other costs involved with running a BTL.
Previously, the lenders were stress testing these mortgages at between 5% and 5.5%. It’s pretty much the same across the board, because a lot of the mortgage products were priced higher than that all the lenders were having to make up their own stress tests. Some were bringing out really strict stress test at 8% or 9%, whilst others have kind of done something in the middle down to the between 5% as it was before to the higher levels. Some of them stress testing at what the pay rate would be, basically whatever product you were taking out would be stress tested at that product. Also, some lenders have kept the previous stress test as well.
So it’s been a mixture across the board, personally I think the way lenders have been stress testing is making it quite difficult for low yielding properties, especially if they are in your personal name. For instance, a property at £200,000 and it’s got £1,000 rental previously that would typically be fine in personal name, but now with a lot of lenders, we’re struggling to place these cases.
What are our clients doing?
For the above reason and due to interest rates rising we are finding a lot of clients are favouring higher yielding properties. So, on these low yielding properties, there’s very little cash flow now with the higher interest rates, and that’s something to bear in mind.
At the same time, though, it’s kind of a kneejerk reaction from a lot of the lenders and as they find out what’s not working, they’ve revised this down. Just recently The Mortgage Works TMW just said that they’re going to reduce the stress as again, a lot of other lenders have also started to reduce their stress test.
I think this will be a continual trend going into 2023.