Host Edmund Greaves is joined by Polly Gilbert, co-founder of digital mortgage broker Tembo, to discuss what’s happening in the mortgage market, how to solve the housing affordability puzzle, and why the Lifetime ISA is a good thing.

Available on Spotify, Apple Podcast and YouTube

PLease note, the podcast was recorded before the results of the General Election were announced.

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The mortgage market was a largely quiet place for more than a decade.

Setting the scene of how we got to this point, before the Great Financial Crisis (GFC) began the Bank of England (BoE) increased its base rate to 5.75% in July 2007.

Once the GFC began, the base rate fell precipitously as the BoE sought to kickstart the economy, plummeting to just 0.5% by 5 March 2009.

From this point, the base rate didn’t rise above 1% for just short of 13 years – an extraordinary period of low rates.  

Move forward to today and the situation couldn’t be more different. Post-pandemic inflation and energy crises sent the base rate soaring to quell price rises. It now sits at 5.25%.

Why this matters for mortgages

The base rate doesn’t directly affect the market for mortgages. Mortgages themselves are priced in the UK by what are called ‘swap rates’. Banks and other lenders use swap rates to manage their exposure to the central bank rate.

The effect of a rising bank rate has been to significantly increase the cost of borrowing for all types of credit. But mortgage rate increases have been especially painful for new homebuyers because they form such a large proportion of household budgets.

Rising mortgage rates mean prospective buyers have to absorb higher monthly payments or find more affordable property. Those remortgaging are finding themselves with significant payment increases and potential difficulty meeting affordability criteria.

Now however, the economy looks to have overcome the worst of the inflation crisis. So the big question looming now is whether mortgages are going to get significantly cheaper again, as the BoE looks to decrease its base rate.

The issue here is that the BoE base rate doesn’t correlate perfectly with pricing trends in the swap rate market. This makes discerning what happens next in the mortgage market more complicated than it would appear.  

When can we expect a base rate cut?

Mouthy Money called together a group of mortgage market experts to gauge their views on what happens next in the mortgage market where interest rates are concerned. The group were somewhat divided on the near-term implications for rates this year.

John Davison, head of product, proposition & distribution at mortgage lender Perenna, says political uncertainty surrounding the potential outcomes of various countries’ elections will have an impact on where swap rates move. This is a bigger geopolitical issue than just the UK.

“We’ve got an interesting Summer ahead of us,” he says. “If the polls are to be believed we are likely to have a change in government in the UK quickly followed up by a budget, an election in France and an election in the US which will feed into swap rates over here in the UK, so there is an awful lot happening before the end of the year.

“Swap rates are pricing an assumed base rate cut of either 0.25 or 0.5% before the end of the year. The outcome of the election and the content of the budget will influence whether it comes in September or October.”

Polly Gilbert, co-founder at digital mortgage broker Tembo agrees, but is plaintive in light of potential rate cut delays: “I have been holding out hope that it would be August. But there is so much uncertainty ahead.”

Gilbert is concerned a new government could choose to take more painful decisions quickly in order to maximise their electoral mandate, which could increase some economic uncertainty.

She adds: “The cynic in me thinks that, if elected, Labour will introduce some of its more grisly and unpopular policies first which could create even more turbulence. Even so, I would like to say the first cut will come on September.”

However, mortgage expert Roger Morris points out that rate cut expectations have had bad form for delays recently. This comes as the key economic factors, such as employment and GDP, which would persuade the BoE to cut have left the situation looking more puzzling.

“I think there will be a bit of a twist to this,” he says. “In December 2023 there was a real sense there would be at least three base rate cuts this year. The BoE were even doing mini summits around the country saying we were going to get that reduction.

“Headline inflationary data may prove to be more disappointing than hoped. I think it won’t be until the latter end of the year that we will see a base rate drop. I still think we are a little way off yet.”

With inflation returning to normal levels and economic growth stalling, many interest rate watchers had expected a BoE cut in June, but this failed to materialise. The BoE’s Monetary Policy Committee (MPC) faced criticism for shying away from cutting the rate at a politically contentious time, with the General Election in full swing.

But Steve Mannakee, national account manager at specialist mortgage lender West One, says in reality there was never likely to be a June rate cut. He thinks the political delicacy of the General Election, despite the inevitability of the result if the various polls are accurate and what the winning political party enacts, is reinforcing a ‘wait and see’ attitude in both the BoE and markets.

“I don’t think there was ever going to be a June BoE base rate reduction,” he says. “The base rate hasn’t gone down as its too politically sensitive for the BoE to do that, but I don’t think it was going to happen anyway.  

“I was also holding out for August but we are almost certainly looking further into the Autumn, likely following the results of a new Government Budget.”

What will interest rates look like in two years?

Our experts would seem to agree broadly that the base rate will start to come down later this year, despite some differences on the specific timing.

But what about the longer term? Mortgages are a strange product compared to say, insurance. We’re all accustomed to the annual dance of insurance renewals, for instance. Get a bad renewal price from your provider and you’re free to shop around.

Mortgages are a longer-term product though, with deals typically fixed for two, five or 10 years. The market is also changing to include even longer mortgages running as much as 40 years in some cases. This makes taking a decision on what type of deal to get a more complex and consequential decision for households to make.

Davison is emphatic that borrowers shouldn’t anticipate big declines in rates for mortgages in coming years, despite the rock-bottom rates of the 2010s until recently being the norm. He also cautions that the base rate and mortgage swap rates are not inextricably bound together.

“We had 10 years of very low mortgage rates. There’s talk of base rate drops of 0.25-0.5% this year, but that doesn’t mean fixed rates are going to come down. The media likes talking about mortgage rates coming down when base rate comes down, but that doesn’t always work in practice.

“Lenders have already priced base rate expectations in. Lenders are currently lending on swaps that are expecting those rate drops to happen. What we have seen over the last two months are rates fluctuating up and down in reaction to the BoE pushing those rate drops back and back and back.”

Gilbert agrees with Davison’s caution over media hype around the base rate, and the overegging of its impact on mortgage rates.

“It’s interesting how the base rate announcement has become such a media moment,” she says. “We see big spikes in activity at Tembo after base rate announcements and that does concern me. There is this sense it will always be the next announcement that will bring a cut.

“That is heightened now as we have hit the inflation target. People are feeling good about that, there are a lot of people asking questions as to why the base rate wasn’t cut last time. To me it was obvious that it wasn’t going to come.

“There is a ‘held breath’ feeling at the moment for our customers, especially among first-time buyers, and people are looking to sell their property. It drives a feeling that when the base rate changes it will be a huge watershed moment where rates will start dropping to 3.2%-3.5%. As an industry we have a role to play in educating people on the reality.”

Roger Morris can see average rates declining to around 4%, but this he warns is dependent on major geopolitical and economic factors, which the UK has little control over.

“The BoE thinks there is still some education needed for families that we aren’t going to get a big drop anytime soon. In two years’ time I think we will get to 4%-4.25%.

“There is some speculation over that period that we could get as low as 3.75% but it depends on the performance of the UK economy. There are so many other geopolitical events that impact mortgage pricing these days and so I think if we get to that 4%-4.25% level we’ll be doing well.”

Davison agrees: “Assuming the base rate stabilises around 3.5%-3.75%, you are still looking at mortgage rates that start around 4% for most products. This is the new normal.

“We are going to see innovation in product availability and types but this is probably the new normal for rates. They aren’t going to come down from much further than where they are now.”

Photo by Karolina Kaboompics

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We have entered a new era in mortgage lending. The era of rock bottom rates is over. The question on everyone’s lips now is where will the market settle are what is likely to be the new normal for mortgage rates?

For most commentators’ rates are still too high, especially as inflationary pressures ease. So, that begs the question when will see a cut to the Bank of England base rate to help stimulate the stalling UK economy?  Well, we’ve got an interesting Summer ahead of us.

There are many external factors that will impact that decision. A new Government is set to be elected in the UK and will most likely signal their intent with a mini budget soon after the polls close. In the wider world we have an election in France that is already creating an amount of political and economic turmoil and a presidential race in the US which will certainly feed into Swap rates, one of the main funding mechanisms used by many lenders in the mortgage market to ensure they have money to lend to homeowners.

All those factors, and Swap rates in particular, are likely to have a huge bearing on the rates UK mortgage borrowers will pay on their mortgages.

Looking at this picture, and contrary to the prevailing wisdom from earlier in the year, I don’t think we are going to see a Bank of England base rate reduction this summer. Not least because a cut this close to an election is too politically sensitive for an independent and supposedly politically neutral Bank of England. In my view we are almost certainly looking at Autumn for any cut and it will likely follow a mini budget from whoever the new government will be.

If the short-term picture is complicated then perhaps it pays to look back. On occasions like this it can be helpful to look to history to see what we can learn about what our new normal may be.

Thinking back to when I came into the industry in the mid-1990s I was advising on mortgages with a five-year fixed rate of 13.65%. That is a figure that may make younger borrower’s eyes water but back then that was considered a good deal!

I mention that as context and to make the point that it’s interesting so many feel that having a base rate of close to zero ushered in some kind of golden era. Perhaps it was if we consider only mortgage borrowers. However, it’s debatable how good those long-term low rates have been for the wider UK economy and it was certainly bad news for savers.

We also forget the driving factors behind why Bank base rate ended up at 0.5%. It was a response to the small matter of a global financial crisis in 2008 which saw lenders such as Northern Rock go to the wall and many another lenders wobble under the pressure.

Taking all of that into account I think the new normal mortgage borrowers should expect for interest rates in two years’ time is likely to be between 3.5% – 4%. That should help ensure that inflation is kept in check, that the UK economy can grow and lenders and borrowers can maintain sensible lending practices which is crucial for a healthy and stable mortgage market.

As the cost of borrowing increases then eligibility criteria may also become more of an issue. It’s more important than ever that borrowers shop around the market and find lenders that can intelligently assess a borrower’s position.

At West One we pride ourselves at taking a more human approach to the eligibility process and I think, now more than ever, that will prove valuable to our customers as they readjust to the new normal in mortgage pricing.

Steve Mannakee is national account manager at specialist mortgage lender West One.

Photo by Ketut Subiyanto

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John Davison from Perenna replies: When you apply for a mortgage, the lender wants to see that you can afford the repayments now, and in the future.

Getting your finances in shape ahead of applying for a new mortgage or a remortgage can really help.

Doing this can give you more lenders to choose from and access to more product options.  

My top tips are:  

• Ensure that you are on the electoral register (sometimes called the electoral roll) and that all your bank accounts, loans, and credit agreements are registered at your current address. This helps the lender get a clearer picture of your finances and can prevent issues later in the process.  

• Make sure you aren’t just making the minimum payment on credit cards.  Affordable, well managed debt isn’t necessarily an issue if the lender can see that you are repaying it and can afford the debt alongside the mortgage.  
   
• Don’t order that new sofa yet! If you plan on taking out more credit, don’t be tempted to order it before you move in. Any changes to your credit file or your expenditure could affect the lenders decision to offer you a mortgage or reduce the amount they are willing to lend.  

Once you have completed a spring clean of your finances, use a broker – different lenders will use different affordability calculations and assess your circumstances differently. A broker can help you find the most suitable product for your needs and circumstances.  

Remember, rate isn’t everything – different mortgages offer different levels of security and product features that may suit your circumstances better.

Work to a budget and ensure that whichever mortgage you choose, it works for you now and in the future. Your broker should take time to fully assess your needs and risk appetite before recommending the right product for you.  

Photo by Andrea Piacquadio

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Mortgage expert Roger Morris replies: The possibility of retaining your current mortgage deal when moving to a new property largely depends on whether your mortgage product is portable.

In the mortgage world, portability refers to a feature that allows a specific rate and the current loan size to be transferred to a new property. For instance, if your current mortgage is £200,000, then that’s the amount that can be ported over to the new property while maintaining the existing rate.

However, if you need to borrow additional funds, the extra amount will be subject to the lender’s current rates, which could potentially be higher than your existing rate.

Your mortgage advisor can quickly determine if your product is portable. It’s important to note that not all lenders offer portable products.

The most reliable way to find out is by directly speaking to your lender or consulting with your mortgage advisor. They can provide you with the most accurate and up-to-date information regarding your mortgage options.

Photo by cottonbro studio

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The mortgage market has had a turbulent time over the last few years. By the end of 2022, as a country we’d gone through four Chancellors of the Exchequer, three Prime Ministers, and a new monarch.

Not to mention inflation rising to 11% – its highest rate in 40 years – and Liz Truss’ disastrous mini-budget sending mortgage rates to levels not seen since the 2008 financial crisis.

Over 2023, mortgage rates continued to stay high thanks to several base rate rises by the Bank of England to curb inflation.

So far in 2024, we’ve already seen mortgage rates fall, rise and fall again, alongside stagnant economic growth – not to mention an election on the horizon.

These economic changes have a huge impact on the property market. First-time buyers are facing the toughest conditions in 70 years, while the current higher rates are squeezing mortgage affordability for remortgagers and home movers.

As experts in mortgage affordability, here’s our advice to first-time buyers and remortgagers looking to navigate this new landscape.

1.   Shop around for the best rates

Don’t settle for the first mortgage rate you are offered, or go straight to the bank you have your current account with.

There are thousands of mortgage products out there, and different lenders offer different rates and terms, so it pays to shop around. Even a small reduction in your interest rate can result in significant savings over your mortgage term.

Working with a trusted mortgage broker can help you find the best deal for you from across the market.

At Tembo for instance, we compare your eligibility to over 20,000 mortgage products and over 15 specialist schemes to find the best ways for you to get onto the ladder, move up it or remortgage.

This includes ways to boost your affordability to access better deals, as well as ways to make your repayments more affordable.

2.   Get expert advice

The mortgage market can be volatile, and it’s impossible to predict what’s going to happen to mortgage rates or property prices over the next few months or years.

But working with a specialist mortgage broker – such as our team at Tembo – can help you navigate fluctuating interest rates, stricter lending criteria, and the wide offering of mortgage products available.

Mortgage brokers are normally the first to know when lenders are going to change their mortgage rates, so can help you lock in a rate before it’s repriced, or let you know when rates change.

If you’re far away from buying or remortgaging but want to keep an eye on current rates, we offer a free Tembo plan you can see personalised interest rates which auto-update every month. 

As experts in affordability, we can also help you find ways you could boost your buying budget, or access lower mortgage rates through a range of specialist schemes.

3.   Understand your budget

While interest rates remain high, it’s crucial to factor this into your budget when it comes to remortgaging or purchasing a property.

While mortgage rates are expected to come down this year, this isn’t guaranteed, and any drop is likely to be gradual.

Try using an online mortgage calculator to get a rough idea of what your monthly payments could look like.

If you go for a variable rate instead of a fixed rate, make sure you could afford your repayments if rates were to increase by 1-3%.

4. Get pre-approved early

In a competitive market, having a mortgage pre-approval gives you a significant advantage.

Getting a Mortgage in Principle – a formal document that shows how much you could borrow if you applied for a mortgage based on basic information like your income – shows that you are a serious buyer who can afford the property, which can be a deciding factor if you end up in a price war.

In fact, some home sellers and estate agents won’t let you view a property without one.

Once you’ve found a property and you’re ready to make an offer, get your mortgage offer set up as soon as possible. You can always re-apply later down the line if you find interest rates have dropped dramatically since you first applied.

Plus, mortgage offers are normally valid for three to six months, so even if rates do rise you’ll have locked in a deal already.

If you’re remortgaging, you can lock in a new rate to switch onto up to six months before your current deal ends.

With our free rate-checking service, if you apply for a remortgage through us six months before your fixed term ends and interest rates go down in that time, we can submit a new application for you at no extra charge.

If rates go up, then your lower interest rate will be safely locked in. So it’s a win-win!

5. Think outside the box

Not only are there thousands of mortgages out there, there is also a huge rise in the number of affordability-boosting schemes to help you get on the ladder, move up it or stay on it. House prices have increased by over 200% since 2000, while wages have stagnated, and lender criteria has got stricter.

The average home in the UK now costs 10x income, while in most traditional mortgages you’ll only borrow up to 4-4.5x your household income, leaving a huge affordability gap.

Using a specialist scheme like a family guarantor mortgage, shared ownership, or 5.5x income mortgages can significantly boost your affordability, help you buy sooner or access lower interest rates.

It can be difficult to navigate these affordability-boosting schemes by yourself, or through a traditional broker. This because a lot of these schemes are niche, and can have very specific eligibility criteria, which can make it hard to find out about them, and know if you qualify for these schemes without an expert’s help.

Whether you’re buying your first home, moving up the ladder or looking to remortgage, staying proactive and getting expert help will help you make the best decisions in today’s dynamic environment.

This blog was written by the multi-award winning mortgage affordability experts at Tembo.

Photo by Kindel Media

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In homes across the UK, a quiet revolution has been unfolding for nearly two years. It is one that could redefine how families view their future financial stability.

In September 2022, the Monetary Policy Committee started the process of increasing the Bank of England base rate from 0.25% all the way up to the current peak of 5.25% to combat what had become a rampant inflation rate.

This rapid rise came without much warning and is a stark reminder of the precariousness of our assumed financial certainties. For too long, homeowners have been allowed to settle into the comfort of low interest rates, treating them as the status quo rather than the historical exception they really are.

The reality is that the low Bank of England base rate was never meant to be a permanent fiscal fixture. That low rate was a temporary measure, and part of a necessary response to the 2008 global financial crisis and again to the economic devastation wrought by the COVID-19 pandemic in 2020.

History shows us how certainty is not a luxury we can count on when it comes to our finances. And here we are, facing another unexpected turning point that leaves us all to consider what the new normal may be for mortgage borrowers in the next few years.

All indications are that interest rates are set to stay a lot higher than we have become accustomed to and that may signal a potentially painful adjustment period for many. But this new normal isn’t just a statistical adjustment on a central bank’s balance sheet; it’s a reality that could strain household budgets significantly.

The Bank of England is aware of that. In its most recent Financial Stability Report it estimated that mortgage payments would go up by 50% or more for 400,000 UK households by 2026 creating more pressure and uncertainty for those people as a result.

The Bank of England must be transparent about the logic behind its decisions and the likelihood and rationale of rate increases or decreases in the future. It is not enough to react to crises; we must prepare for them.

Even for industry experts, predicting where the base rate will be over the next two to three years is a challenge. While the expectation is they will tick down a little from where they are today the fact is that rates in and around 4% is the least we should expect in the near-term at least.

With that in mind, fixed-rate mortgages, may also be considered the first line of defence for borrowers seeking stability in an unstable economic environment. Many homeowners have purchased properties based on unusually low interest rates, with rates close to one percent being the norm.

But when those families look to refinance and they are finding mortgages prices in and around the 5% mark instead. In that context, locking in rates you can afford now, may be sensible for many.

The fact is that the ‘certainty’ of low interest rates was never a reality. This new normal of mortgage lending in 2024 proves that. It is a new normal that will require adaptability, foresight, and resilience from borrowers and I am certain of one thing. That the people of the UK possess those qualities in abundance.

Roger Morris is a mortgage market expert with over 30 years’ experience in the sector

Headline photo by Tima Miroshnichenko

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Steve Mannakee from West One answers: Getting a mortgage when you’re close to retirement age can be more challenging than it is for younger borrowers, but it’s certainly not impossible.

Lenders do tend to have maximum age limits for when a mortgage term should end and will closely assess how applicants intend to maintain their repayments by scrutinising pensions and other sources of retirement income.

The type of mortgage being applied for and the loan to value ratio will also be considered carefully. For some older people it may be wiser to consider equity release depending on their personal circumstances and so it’s important to take financial advice or speak to a broker to assess your options fully before making that decision. 

At West One Residential Mortgages our loans work on the assumption that the applicant is 70 years old at the end of the mortgage term. However, we can still lend to a term beyond the age of 70 by assessing the applicant’s earned income. Approving a loan is possible provided the applicants occupation is one we are generally comfortable they can continue working in and receiving an income from.

Our own lending criteria means that we can consider offering a mortgage to a borrower that meets the criteria, provided it comes to the end of its term by the time that borrower is 85 years old. So, that does give plenty of scope for lending to borrowers later in life provided their circumstances are thoroughly assessed and deemed to be viable. 

In many cases it can actually help with overall affordability if the term of the loan is extended beyond retirement age. Increasingly we are seeing borrowers take this option to help spread the load of repayments over a longer time horizon. 

We also have the ability built into our decision process to use earned income beyond our own “assumed” standard retirement age of 70 years of age. That is providing the applicant is at least 10 years away from 70 at the point of application and has a pension in their name that is actively being contributed to.”

Photo by MART PRODUCTION

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What is happening in the mortgage market? Where do rates go now the Bank of England is looking to cut its base rate?

Host Edmund Greaves is joined by mortgage expert Roger Morris and John Davison from Perenna to talk about what happens next in the mortgage market, and whether we’ll ever get low rates again.

Listen on Spotify or Apple Podcasts or watch on Youtube

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Polly Gilbert from Tembo responds: The key benefit of a tracker mortgage is that you’re not locked in and left overpaying if rates come down. If interest rates drop significantly, and you find yourself locked in on a five-year product term with a hefty early repayment charge to get out of it, you could – by comparison – save money by being on a tracker deal which would drop automatically.

Tracker mortgages also offer more flexibility than fixed-rates, as they often have no or little early repayment charges (ERC). This can make it easier to switch to a new deal if you want to change providers or move to a fixed-rate deal.

For this reason, some customers might use a tracker deal if they know they might be moving or selling in the next year or so, or if their future at the property isn’t certain. Be aware that some tracker products do have ERC’s so do check this.

The main drawback of trackers is that you will typically pay a higher rate of interest. You’re essentially paying more from day one, and gambling that rates will drop over time. Often rates would need to drop considerably for you to be “up” on the going rate.

For example, the best 2-year fixed rate deal right now is 4.67%, while the lowest tracker rate is 5.39% – that’s 0.72% more*. Hypothetically, if the base rate drops by 25 bsp to 5% in autumn (which it’s widely expected to do), it’s unlikely someone on a tracker would be on a better rate than if they had signed up to that 4.67% fixed rate. Then you’d be waiting with bated breath for the next MPC meeting in another 6-weeks.

When comparing options of two-year fixed versus two-year tracker deals, you need to consider the amount of time it would take for rates to come down enough. If it took a year and a half for your tracker deal to drop below the original fixed rate, there might not be enough time left on the tracker for you to make up the money lost on paying higher repayments up until then.

There are longer term tracker products available but these come with higher interest rates of circa 6%+ and therefore create a greater margin of rate improvement needed for it to make financial sense.

The second drawback of a tracker is that you don’t know what your monthly repayments will be each month. With a fixed rate mortgage, you have certainty for the years ahead, for budgeting, planning, even mapping out overpayments.

We always advise customers that if a rate of 2-3% above the current best tracker deal looks terrifying, then a tracker might not be for them; you have to be comfortable with a certain level of risk and variance.

Despite the media furor around the base rate and the potential for lower rates later this year, we haven’t actually seen a big increase in customers opting for tracker deals. With the cost of living crisis still pinching, a lot of people want the security of a fixed rate product, and for others, the current fixation on rates means that a ‘4-something’ rate is much more appealing than a ‘5-something rate’.

Ultimately, what’s best for each person is down to their individual circumstances, the level of risk they are comfortable with and how much flexibility they need. This is why it’s always best to seek expert advice when it comes to choosing a mortgage deal.

It may look like a fixed-rate mortgage is the best option when you look at simple comparison sites. But this doesn’t take into account your risk appetite, if you could cope with rate rises financially, or what flexibility you might need to exit a deal.

*Accurate as of 2nd July 2024. Based on 60% LTV, 35-year mortgage term. Your home may be repossessed if you do not keep up monthly repayments.

Photo by Alena Darmel

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