The mortgage market is a bright spot in the UK cost of living crisis

Suspension

There is a lot of financial doom to be found in UK consumer news these days. However, setting aside the dire consequences of the cost-of-living crisis, the picture for homeowners who need to refinance their mortgages is improving dramatically — good news for both the housing market and consumers.

With 85% of mortgages being fixed rates but most only lasting two years, there was always a reckoning as the Bank of England raised official interest rates last year to 3.5% from nearly zero. But mortgage rates fell from their November highs even as the central bank continued to tighten policy.

The premium that lenders charge for taking the risk of an individual borrower compared to market interest rates is now lower, about 100 basis points over the BoE rate. It widened to more than 250 basis points in the wake of the Les Truss trainwreck of tax plans in September. Moreover, there is a huge increase in the amount and variety of mortgage offers available.

In the UK, lenders usually commit to offering the mortgage for six months, to allow buyers enough time to navigate the legal process. Lenders ran for the hills when yields from basic gold began to skyrocket, and pulled the products. Until the market calmed down, many smaller lenders resorted to offering rates that were priced primarily to avoid business, driving up the average title rate even though very little business was actually done at such high levels. According to data compiled by retail financial data firm Moneyfacts Group Plc, a tally of the best available two-year fixed-rate deals from the UK’s six largest lenders offering over 70% home loans shows that it was always possible to secure a slightly lower rate. 6%.

The picture of mortgage availability has improved dramatically, even though the Bank of England has doubled interest rates since late September. There are currently more than 3,600 mortgage products on the Moneyfact website, up from 2,250 in October. The average life of a mortgage product has fallen to 15 days — the joint lowest on record — but, unlike in October, that’s because lenders have lowered the rates offered to become more competitive.

The former market preference for two-year fixed-rate mortgage deals is quickly shifting into demand for five- and 10-year deals. Helpfully, the interest rate swap yield curve, where lenders hedge their net exposure, has inverted with two-year swaps currently at 4.32%, five-years at 3.86% and 10-years at 3.60%. Banks and mortgage lenders are in good shape, and as interest rate volatility subsides, they are competing more aggressively for business at a time when mortgage demand is relatively weak.

The Nationwide Building Society offers two-year fixed deals at 4.84%, and five-year money at 4.43%, although there are lower rates available from smaller lenders who decide it’s safe to get back in the water. Lloyds Banking Group Plc is offering a 10-year deal at 4% interest. It is even possible to get a buy-to-let deal for landlords on a similar level. Variable Tracking deals, which are linked to the BoE base rate, are available at 3.74% from Barclays Plc. One year unsecured personal loans on credit card are available at rates as low as 3.5%. The body language of the lenders is that they clearly don’t expect interest rates to rise much more than that, and they like to build their loan books at those levels.

The improvement in the mortgage market offers little solace to borrowers, who will see the percentage of their income devoted to servicing their mortgages rise, since more than half of the $1.4 million fixed-rate mortgages that expire this year will have to be refinanced at twice current borrowing costs. But at least the worst-case scenario of rates of 6% or higher has been avoided. While this won’t stop home prices from correcting downward after a stellar streak since the pandemic, it should at least mitigate deflation.

More from Bloomberg Opinion:

• Peak prices are great for us, bad for shops: Andrea Felstead

• London teacher cherish? When Pigs Fly: Matthew Brooker

• You’ll Pay to Wait to Refinance Mortgage: Marcus Ashworth

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

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

More stories like this are available at bloomberg.com/opinion

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