Mortgage Expectations

People up and down the country are feeling the strain of the cost of living crisis. With interest rates rising sharply in a bid to curb soaring inflation, the resulting higher mortgage rates will add more pressure to the monthly budgets of millions of UK homeowners.?To offer a helping hand here, we take a closer look at what's going on in the mortgage market and examine how things could change in the future.?

One question you may be asking yourself right now is whether now is the right time to fix your mortgage rate. Let's weigh up your options.?

Mortgage rates seemed on a relentless climb this year, now sitting at double what they were at the start of the year. But the latest rate drops the past few weeks have economists questioning whether this indicates a steady decline in 2023—or this is the calm before another storm of rate hikes. The average 30-year, fixed-rate mortgage was 6.58% for the week ending November 23. It was the second week of declines after the rate reached as high as 7.08% November 10. While some experts say they’re hopeful that interest rates won’t rise further this year, others say the increases will likely continue into early 2023 until inflation is under control. Since (November 21), the average five-year fixed rate has fallen 0.06 percentage points. Meanwhile, the average two-year fixed rate has fallen by an even greater 0.08 percentage points, from 6.21 to 6.13 per cent.

There’s a widely held expectation that rates will likely continue to undergo some amount of upward pressure in the coming months—or at least until inflation is moderated. While some housing experts say mortgage rates have likely reached their peak in the wake of the latest rate declines, they remain cautious given the extreme fluctuations and economic uncertainty of the past year. With inflation still north of 10% and the BoE committed to keeping increasing the fund's rate over the next few months, the mortgage market is not out of the woods, Ratiu said. We may still see rates rebound back above 7% on begin of the year.

?Brokers have noted the increasing number of homeowners opting for longer-term fixed-rate mortgages, in an attempt to try and ensure stability in their home finances.?And yes, borrowers did tend to pay more to fix in for longer historically, but the price gap is closing, so fixed-rate mortgages really are worth exploring.?In fact, long-term mortgage deals are very competitive at the moment – with only 0.45 per cent interest separating a two-year fix from a ten-year fix.??

Fixed-rate vs variable mortgage

As the name suggests, fixed-rate mortgages ensure your interest rate is fixed, say, for five years, and when your fixed-rate period ends, you will then move onto the lender’s higher standard variable rate (SVR).??

On the flip side, if you take out a variable-rate mortgage, then the interest rate would typically rise and fall at the mercy of the lender throughout the lifetime of the mortgage. But you could benefit from a lower mortgage rate, depending on the individual deal. Homeowners need to be diligent at the moment and ensure that they are living within their means. The stamp duty reduction and the recent removal of mortgage stress-testing criteria should offer some much-needed help on the affordability front. But still, homeowners need to budget, research, and do their due diligence before choosing their mortgage.?

This may happen – or it could suggest that markets are being too slow to recognise whether we are moving from a low-inflation/low-rate regime to one where both are at more historically normal levels.?

Is There Still Time To Refinance?

Homeowners watch mortgage rates closely, and any time rates pull back even the slightest amount, more people apply for mortgages. Applications remain stuck near the lowest level in more than two decades. Before you start shopping around for a lender, you can find out how much you could save by using mortgage refinancing.

You’ll also want to consider how long you plan on staying in your home as the closing costs can eat up your savings if you sell shortly after refinancing. The closing costs to refinance run between 2% to 5% of the loan amount, depending on the lender. So you should plan on keeping your home long enough to cover those costs and realize the savings from refinancing at a lower rate.

These providers include Natwest, Nationwide, and Barclays, but remember, that’s from the date of the offer issue (after underwriting). Smaller or specialist building societies usually offer three to six months, so some will cut off after around 90 days. But many will be open to extending their offer based on your circumstances or for a fee. If you will be looking to get a mortgage in the coming months, get your documents in order in good time. Remortgaging with the same lender can save some time, and often doesn’t come with fees, but you can’t be sure you’re getting the best interest rate on the market – so shop around.

Keep in mind that the rate you qualify for also depends on other factors such as your credit score, and debt-to-income (DTI) ratio. The debt-to-income (DTI) ratio measures the amount of income a person or organization generates in order to service a debt. A DTI of 43% is typically the highest ratio a borrower can have and still get qualified for a mortgage, but lenders generally seek ratios of no more than 36%. Important as well loan-to-value (LTV) ratio, and proof of steady income.

We won’t know for a while, but if markets are wrong, this will have huge consequences for the pricing of all sorts of assets. However, for anybody looking for long-term mortgage security, the gap between five-year and ten-year rates looks notably low – and might not last much longer if expectations change.