What to Do If Your Mortgage Rate Jumps

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Welcome to Merrin Talks Your Money, the personal finance edition of Merrin Talks Money. In these bonus podcasts, we talk about the best strategies for making the most of your money. I'm John Stebbick, senior reporter and author of the Money Distilled newsletter. I'm in this week while Merrin's away.

Now, earlier this week.

It was revealed that the average interest rate on a new five-year fixed mortgage deal had hit 6% for the first time.

In three years.

Now, this is not the deal that most people get. Most of us get the best buying mortgages. But on that front, what really caught my eye was that in the past month, the number of sub-5% fixed rate mortgage deals has collapsed from something like 1,500 to nearly zero. So it's very obvious that rates have gone up significantly.

So for today's personal finance discussion, I wanted to get some clarity on why this has happened, the current state of the mortgage rate, the kind of things that are driving rates just now, and what you should do about it, particularly if you're coming up to refinancing your mortgage in the next six months or less. Joining me to discuss this is Anthony Emerson. Anthony's the director of Mortgage Brokers Trinity Financial, which is a London-based firm that specialises in bespoke mortgage advice. He last appeared on the show in May, and before that, he was an expert voice in our How to Buy a House series. Welcome back to the show, Anthony.

Thank you, John. Pleasure being on again.

It's really good to have you back.

You last came on in May, and since then, things have got even more exciting for the mortgage market. So I remember the last time you were on, you were reminding us that at the start of the year, you could get a two-year fixed rate mortgage for about 3.6%. And when you came on in May, that had jumped up to 4.7%. And since then, we've had a bit of a brief lull, but one of the most eye-catching statistics that was from Moneyfacts, which is obviously a data provider, in the past month, as everyone's been freaking out about global bond markets again, the kind of number of sub 5% fixed rate deals has dropped from around 1,500 to almost zero.

I think they said there's exactly nine deals excluding Northern Ireland, which is a slightly different system.

So what's going on there? What's happening?

And also, how can we get one of those sub 5% deals if we need to?

The mortgage market has changed significantly. We have lenders repricing sometimes once or even possibly twice a week. because the Sonia swap rates are changing quite dramatically. We're in this very strange period where a lot of people think that the Bank of England base rate is what controls interest rates.

And the Bank of England base rate hasn't moved. So we've been at 3.75 from the beginning of the year through to now. And the oil crisis that kicked off as part of the Iranian war has caused a lot of the sort of swap rate markets and the guilts, which really derives fixed rate mortgages in particular, to change quite dramatically. And the speed at which they change caught everyone off guard. So we have now seen, you know, those rates at 3.6 that I mentioned in sort of my last meeting with you now being closer to, you know, five mid fives um the average swap rate the average two-year fixed rates and the average five-year fixed rate that money facts quotes is taken from a very wide range of products the average person on the street is still

getting considerably better rates than that so you know we have like you say got around about three or four lenders that are still offering deals at below five percent you generally have to be a high earner and be a premier banking customer relationship with them to be able to qualify for them. But things are not quite as bad as that headline-grabbing interest rate that you mentioned.

Well, it seems to actually, I mean, because that's another good point there, because I remember there was a point, even after this kind of more chaotic period or the higher interest rate period we've gone into, But, you know, at the start of the year, maybe a year and a half ago, your deposit didn't make as much difference to the interest rate you were offered as perhaps it does now. So I'm kind of wondering, if I've just got, let's say, a 10% deposit now and I'm a first-time buyer, what are the kind of rates I'm looking at compared to somebody with, you know, 40% who's kind of either remortgaging or moving house?

I mean, I looked at that before we started the conversation today, and if you had a 10% deposit on a property, interest rates would start at around about 5.40% for a two-year fixed rate.

Yes, that's quite a big difference.

It is quite a big difference, but when you consider that the sort of 60% loan-to-value is priced at around about 5%, it's not dramatically bigger. Yeah. It's still manageable and it's still encouraging as many first-time buyers to get into the market as possible. At 95% loan-to-value, where you're only putting down a 5% deposit, interest rates are currently starting at around about 5.74, 5.75. So that's your highest risk margin for the lender and the difference between the 60% where it's the cheapest products and the highest range at 95% is around about 0.85 of a percent, which it's large, but it's not eye-wateringly large. Yeah.

So this is interesting as well, because is it fair to say that banks still seem, there's not a panic here. This is just repricing, isn't it? Because they're still happy enough to lend to people. And the multiples, I'm right in thinking that there's still getting slightly more relaxed about the terms in which they'll lend to people in terms of kind of level of income and that sort of thing?

It's more generous now than it has been in the past. I mean, we have more and more lenders, particularly if you're a first time buyer, lenders are sort of pushing the envelope quite far and sort of lending five and a half, sometimes even six times your income. Now, Once you go beyond five times your income, you're starting to sort of stretch things a little bit too thin. And obviously, these higher interest rates make borrowing that amount of money a little bit more difficult for you to be able to fund the monthly payments. If you are, however, young and you can stretch it out over a 40-year term, those monthly payments are decent and We're still having conversations even today where those monthly premiums, if you're young and

you can take a 14-year term, are actually comparable to what they were paying in rent. Maybe a little bit more, but you have to understand that there's an element of capital repayment built into that payment where in rent there is none.

Yeah.

That's an interesting point because, I mean, I do remember, again, when you last came on, there was a sense that the cost of renting versus ownership was.

sort of on a par.

Um, and then if you take the capital gains element and then you're still, as you say, paying off the loan over time is rent, obviously it's perpetual. How would you say that balance has shifted in favor of renting over the last four months or in favor of buying or not that much to it?

Because of the fall in the number of rental properties becoming available now, um, you know, the renters reform actors had that unintended, um, Consequence of.

Unintended, predictable consequence to anyone but a politician.

Well, predictable to anyone who was in the market, unpredictable to those in control, it would seem. But the Renters Reform Act and all those other influences, lack of properties on the market, has caused rents to continue to rise at a steady clip. And because of that, we are not as far off that par sort of calculation that we were back in May. because rentals have continued to increase.

So personally, I think if you are a first-time buyer and you're looking at it, I would definitely have a conversation with a mortgage broker to find out what your borrowing capacities are, to have a look at what the interest rates and the payments might be, and then make that decision as to whether or not you want to go down that road. And I say that because of the fact that at the moment we have Flats in particular being very, very competitively and significantly lower than they were at their peak. So if you're looking at, is it the right time to buy? The right time to buy is always before it hits the bottom. And we have dropped a fair amount. And I would probably say to you that we are nearing that point. And it

might be worth those first time buyers actually doing that calculation and seeing whether or not we can facilitate what they need.

That's interesting.

In terms of the flats specifically, I mean, obviously there's a lot of factors affecting the market there. What do people need to watch out for if they are considering a flat? What is it that's actually driven? Because basically, if you look at property statistics, you've got your super prime market, which has fallen, and you've got the market for normal family houses increasing. is basically flat. It's not really suffered, particularly relative to the rest of the market.

And in some parts of the country, it's still ticking higher. So what is it about flats that has kind of caused this? Because it is pretty significant drops, isn't it?

Relative, you know, very, very significant drops. Yeah. I think it's a supply and demand issue. New developers are definitely not rebuilding houses anymore. They are building flats because of the number of units that they can get onto the land. The government is trying to hit its million plus new developments in their parliament. And we've also got a huge amount of landlords. I mean, a survey the other day done by the National Landlords Association said that of their survey, 48% or so of their landlords intend to sell within the next 12 months or when their mortgage comes up for renewal.

And two reasons. Number one, that mortgage that's coming up for renewal is probably at an interest rate at somewhere around 1% to 3%. And that could be going on to a sort of 5% to 6% interest rate. So that gives them thought to change all the taxation reasons that have hit landlords. and all these new rules and regulations.

So we are seeing that we have more flats on the market than we have buyers for them at the moment. And I think people have been holding off on buying flats because they think, oh, that market's falling, so I'm just going to wait for it to go. But I think we are at that point where things are starting to look interesting and worth getting involved in because I don't think that they can fall much further without sort of triggering a bit more of a wider problem.

That's interesting.

I mean, in terms of a wider problem, do you mean negative equity and kind of knocking on to the.

I think those who bought these properties in the last sort of five years are possibly looking at not quite getting their money back. I've had a number of those conversations with people. So they most certainly haven't made anything out of these properties. People who've bought them within the last 10 years are going to be making a significantly smaller profit margin. And people who've owned them for ages are probably going to be worried about the changes that are going to happen to capital gains taxes.

Have you had any conversations about how the prospect of leasehold reform is affecting those flats in particular? Because I'm aware the government's kind of planning to bring this in, but to an extent it strikes me that leaves people who've got existing leaseholds with an asset that's potentially worth less because it's encumbered by these issues, whereas the new flats possibly won't be.

That is a very small part of it because I think the people that are holding out for that are just hoping for the best. We have seen a lot of people just extend their leases because of the fact that they need to for matters of finance and sale and things like that. But the government doesn't move too quickly on this point. We've been having this discussion on leasehold reform now for many, many years and we are yet to see any of the terms and conditions as to what they think they're going to put in place.

So yeah, so with in mind that one should be careful with service charges, cladding issues and leasehold and all the rest of it, now might be a good time for a buyer armed with a lawyer they feel they can trust to maybe take a look at the flat market.

Yeah, I think, you know, if you are buying flats and things like that, the ground rent and service charge is two of your biggest things that you need to look out for. Some of them can be relatively astronomical and they never ever go down they never get more.

Expensive yeah well this this is the problem so if yeah if you can find common hold and obviously if you're outside england and wales this isn't actually a an issue um because obviously as you can tell from my accent from scotland where we don't really have leasehold as a as a thing and looking at the prime london properties was another eye-catching stat from savills this week which was basically the prime london properties fallen by 27 percent in nominal terms since 2014 and i'm just wondering that that kind of top end of the market what are you seeing there what is it that's well a kind of why have we seen that significant a drop over that time but also is there any sense that that might turn around, that the kind of world's super rich

might start to think, oh, wait a minute, this stuff's starting to look cheap, you know, it's property in Mayfair or whatever, or is it a bit too early and a bit too politically sensitive for that?

Personally, I think that the very top end of the market has been hit by a lack of confidence in the direction of travel of the UK government. Yeah. Those individuals are very, mindful of of taxation issues are very mindful of um the way that they are treated within our economy and i think for that reason we are seeing a fall because of the fact that there are less people interested in investing into that asset when you've got other areas of the world that are looking a lot more attractive.

Yeah so basically it's sort of part of the whole wealth exodus issue a to mere mortals um you know if if you own a house just now and you've got a mortgage and you were lucky enough to be one of the last people to get onto a one to two percent loan the kind of tail end of 2021 early 2022 and you're now staring down the barrel of like five percent remortgaging What should you be doing?

What should you be thinking if you're coming up to refinancing within the next year or the next six months?

I think the first thing to do, John, is don't panic. It's easy for you to say. We are seeing a significant mortgage shock as being a major part of our conversation piece with clients. And how do we mitigate that payment shock? And there is a number of different ways that we can look at it, and we can possibly extend the mortgage term, which would then allow that client to have a longer period to pay it back, which would make your monthly premiums lower. We could possibly consider, if applicable, using part interest only, part capital repayments, or even possibly go as far as full interest only in order to make those payments similar to what they were paying before. Quite a few people who took those mortgages

five years ago might have had children. Some of them might be having school fees and things like that. And people are making changes to the way that they take that mortgage out in order to try and keep their payments the same so that they can afford the same quality of life. Unfortunately, people who are on interest-only mortgages are seeing the greatest payment shock because of the fact that it's a direct correlation between interest rates and monthly payments because there is no capital repayment element to it.

People who are on a capital repayment mortgage are seeing a much lower payment shock because of the fact that the way that the curve works, it softens the blow relatively significantly. So rather than it being three times, four times more expensive as it would be with an interest-only mortgage, the capital repayment client is seeing only a change to what they were paying before, maybe £ 500, £ 600, £ 700 on their maybe £ 1, 200 mortgage that they were paying before, which is a lot more manageable than being asked for three to four times that figure.

Actually, just something you raised, do you still see many people coming and rolling off of interest-only mortgages when they're actually home owners as opposed to landlords? Because that's relatively unusual.

We have a lot of interest-only clients because of the fact that we have certain clients who are quite heavily incentivized with big bonuses.

Of course, yeah.

And from a month-to-month point of view, let's just say you get rather large bonuses in hundreds of thousands, but your basic salary is $ 100, 000. Yeah. Being able to do a capital repayment mortgage with your $ 100, 000 monthly salary is a little bit more tricky than being able to do it with an average of that whole number. So with interest only mortgages, those clients then make a lump sum reduction at the end of that financial year, or they invest that money elsewhere. In the past, when interest rates were 1% or 2%, elsewhere they could get a better yield.

So they were investing that money into other assets, which would give them a higher yield and they'd maintain their interest-only mortgage at 1% and be quite comfortable. Now those yields are a little bit more difficult to get an after-tax yield at 5%. And we are seeing significant reductions in those mortgages by people sort of cashing in those investments and those other assets that they have and lowering the amounts of their mortgage. But it is still a very popular part of the mortgage conversation for your higher owners.

In terms of the practicalities as well, so the last time we were talking specifically about if you are coming up to the end of a deal, any time up to six months and preferably basically as soon as possible, you should start talking to your mortgage broker. Is six months about right?

Six months is the earliest that we can put anything in place because a remortgage product is only valid for a six-month period as a maximum. And that's because the lender has to put that money aside in readiness for you to draw down on those funds. And they don't want to put them aside in perpetuity. They want to have a defined timeline. If you don't use it within that period, the money comes back into the flow and away it goes. The biggest thing for us is start early and start having the conversation early around about six and a half months out, start having the conversation with your mortgage broker so that you know that you can put together all the paperwork, documents, et cetera, ready to

go at the point where you are six months out. You then apply for that mortgage, you get something in hand, you are not committed to take that mortgage out. You can walk away from it, you can cancel it, you can change it to a lower deal if a lower deal becomes available, you can change lender over the course of the six months. But what we're saying to people is, don't hang about, grab something now, put it in the back pocket, safe and secure so that you know what you are going to pay. And if things improve, fantastic. However, if things go the opposite direction, you've done the best you can at the earliest point that you could. And the poor mortgage broker might need to re-broke that mortgage

three or four times over the course of the next six months, but that's pretty much why we exist.

Well, they make you earn your money.

True Scottish.

Exactly, exactly.

I mean, in terms of, obviously you shouldn't ever be betting your future on what might happen to interest rates, but this also does feel like a particularly difficult time. Even, you know, looking back, certainly I find it very hard to have any kind of level of high conviction as to what might happen to rates next. So what are you telling clients in terms of the choice between fixed and variable rate mortgages? Because obviously you can still get variable for what, about half a percentage point less than the fixed?

It's widened of late. When I was looking at them yesterday and having a conversation with various different clients, the margin had widened up on two conversations. One of them was 0.78 of a percent. The other one was over 0.9 of a percent. So effectively a tracker rate now has three Bank of England base rate rises available within it until you get to the point where you are starting to match the available two-year fixed rate. So if you've got people who are a little bit more open to taking the risk, because obviously trackers are more risky because it might not stop at three Bank of England base rate rises. It might continue beyond that. In which case, if you sort of decide, actually, no, I can't handle this.

I want to dive out of it into a fixed rate. You have to take whatever the market's offering at that point, which could be anything. However, given that swap rates have moved so significantly, and as you see, they're not linked directly to the Bank of England base rates, they might remain at this level where you could take this tracker rates, be on a much lower rate initially, and then gradually increase that rate as the Bank of England increases its rates up to try and control inflation. Because that's the Bank of England's job, is that it tries to use the Bank of England base rate to control inflation, and the swap rates are based off the confidence in the market for people to lend, the various different institutions to

lend each other money, and they forward price based on a two-year or five-year or 10-year modeling of where they think interest rates are, which is why the swap rates have risen and gilt rates have risen so significantly compared to the Bank of England base rate, which has remained stable. But the track of fixed conversation is a difficult one because it does come down to the client's attitude to risk.

If you are, you know, got a mortgage that's infinitely affordable, maybe only sort of three times your available income multiple, then you've got more sort of capacity to take on that extra risk in case something goes wrong. If you're trying to borrow five and a half times your income on a tracker rate, it might be a little bit more risky if things start to go the opposite way.

Yeah, so basically you just have to model how much your monthly payment would go up to in a worst case scenario, I guess.

And then, you know, being able to stress test that payment against your capacity and the way you want your lifestyle to be lived.

And yeah, just one last question, actually, I wanted to kind of pick up. This new help to buy policy that the government is looking at or is going to announce, your first home, enabling people to buy with a 2.5% deposit and a 20% equity loan from the government.

Have you any thoughts on.

How that will affect the market this time round? Because obviously it's quite a different set of circumstances from when help to buy came out in 2012, I think it was, 2013.

The fact that these are looking like they're going to be restricted to new builds only, that policy looks to me like it's being used to get the builders to use the land banks that they've got to be able to develop the houses in order to try and meet the one point something million homes that they want. Is it the right thing for the overall general public? Probably not because if you flood one part of the market, it has unintended consequences on the rest of that marketplace.

It's really good for developers. It's really good to try and get Britain building again. But those builders will only build at a point where they feel that they can get the price they want and need for development to be financially worthwhile. We are still in a world where those costs of build and materials and labor and all the other bits and pieces are quite a lot higher than they used to be. And it's hard for them to be able to make their margin. So I think it will help, but I don't think it's going to help quite as much as that helped to buy it back in the day.

I know this isn't your area of expertise necessarily, but what would you do in terms of, what do you think would be a better solution for encouraging builders to build without having to essentially dump all the negative equity risk on the first-time buyers?

It's a very, very difficult one to solve, John, in my opinion, because of the fact that we have a massive oversupply of flats at the moment. And I think we have the buyers for them. But as I said to you earlier, I think those buyers are somewhat holding off at the moment with this belief that everything is going to get cheaper and cheaper and cheaper. And I think we've seen a significant move in the market. And I think we're at that point now where it might very well be worthwhile for these people to come out of hibernation and start getting involved in it. Until we get a sort of supply and demand balance... any of these sort of incentives are going to be lost. Because if you're only putting down a 2.5% deposit plus you

are getting a 20% grant from the government, that's great. It helps you get onto the market. It all just depends on what the products look like that come with them. What are the price of them? How affordable are they? How do they compare to local rents? Because we need to reach that balance where it actually becomes worthwhile for somebody to get involved in it and most people you know these products tend to come with like a five-year lifespan they need to believe that they will be able to make a margin within that five years in order to make it worthwhile because two and a half percent is is very very small change in the property price for you to effectively fall into negative equity.

Yeah especially if you're buying a new build because as soon as you walk into the new build it drops in value Especially in.

The first year or so, but then it should then claw its way back up again. But when you've only got sort of two and a half percent deposit it doesn't have to fall by very much for you to be effectively negative equity in your share and your ownership of.

That property yeah yeah and then you're stuck i.

Think i think i think it's it's a it's a great idea with a couple of tweaks that need to be done anything that's you know stimulates the market i'm up for but it's just about trying to do it in the right way. It would be nice if that product was available for both new build and for secondhand homes so that we can get the whole market moving and not just doing it to benefit one person in particular, which is the developer.

On that diplomatic note, Anthony, I really appreciate your time.

Pleasure being on again.

Thanks for listening to this week's Merrin Talks Your Money If you like our show, rate, review and subscribe wherever you listen to podcasts. Also be sure to follow Merrin and myself on X. Merrin's at MerrinSW and I'm John underscore Stephek. This episode was produced by Summer Sadi and Moses Andem. Questions and comments on this show and all our shows are always welcome. Our show email is merrinmoney at bloomberg.net. And a special thanks to Anthony Emerson.

What to Do If Your Mortgage Rate Jumps

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