33 years on from 1st March 1990, Martese Carton, Director of Mortgage Distribution at Leeds Building Society, looks at what borrowers must consider when choosing their mortgage
1st March 1990 has long been an important date in the history of the UK mortgage market: it was the date when mortgage rates hit their all-time peak of 15.4%.
Rates stayed this high until October of that year when they were reduced to 14.5%. The record interest rates were one of the main drivers for the record level of arrears and repossessions seen in 1991, where over 75,000 homes were repossessed.
Of course, the market back in 1990 was totally different to today’s market. Fixed-rate and tracker mortgages were still very much in their infancy, which meant borrowers had little or no protection from the escalating interest rates and the spectre of falling house prices and negative equity.
Thankfully, today the market is much more advanced, and borrowers have lots of choice regarding products. However, today’s borrowers have not been immune from their own worries and have faced real financial worries as political upheaval and the reaction to last September’s mini budget caused the cost of fixed-rate mortgages to increase rapidly.
The fall out of the mini-budget was huge. Money markets were spooked, and some lenders temporarily pulled out of the mortgage market altogether. The choice of products was severely reduced and the price of two-year fixed-rate mortgages hit a high of 6.43% – an increase of around 50% in a matter of weeks.
To protect themselves from rising interest rates, borrowers turned to tracker rate mortgages where the interest rate is pegged to the bank base rate rather than take a risk with fixed-rate loans which reflect the volatility of the money markets. The speed at which borrowers opted for tracker loans was enlightening.
According to broker London Money, only 2% of its customers took out tracker mortgages in September, but by November this figure had increased to 63%. By January, after the gap between fixed and tracker rates had narrowed, its customers were opting for an almost equal split between two- and five-year fixed-rate loans, and tracker mortgages.
Many commentators are now saying that after 10 successive increases in base rates since December 2021, it is likely that interest rates could peak this year at around 4.50%. If this is accurate, it could mean that the MPC meeting in March might be the final time in the current cycle that interest rates are increased.
It is expected that base rates will then remain at this level until 2024, when they will start to fall again – and quite quickly. We are already beginning to see this reflected into money markets highlighting the market’s expectation of future base rate falls.
So, when should someone fix?
The general feeling in the industry is that fixed rates are likely to fall further. Fixed rates are governed by not only the bank base rate, but also by the expectation of what the markets expect borrowing rates might be in the future. These are generally known as Swap rates.
With base rates at – or near – their peak, it means that a typical two-year tracker product will currently be priced at around 5% whilst a two-year fixed-rate loan is heading downwards from its current average of around 5.5%. It now looks as though the “financial crossover point” could be a matter of months away.
The popularity of fixed-rate deals is well known. They allow borrowers to lock in and gives them the chance to cap their mortgage payments. Many borrowers will also want to fix their payments ahead of the forthcoming general election – traditionally a time of political and financial unrest for money markets.
The other key part in this mortgage conundrum is the fact that around 1.4 million borrowers will be coming off existing fixed-rate deals this year – with many of them currently being on sub-2% deals. Lenders will be keen to hang on to their market share, and borrowers will be desperate to keep their rates as low as possible. This fact will inevitably drive fixed-rate pricing down still further.
Here at Leeds, we have seen a lot more re-mortgaging right across the board. Much of this is due to landlords trying to protect themselves from interest rate rises but there are still some landlords raising deposits to increase their Buy to Let portfolio. Although research shows that many landlords have sold or intend to sell properties over the coming months, some professional landlords are still looking to increase their portfolios.
Currently about a quarter of our new mortgage applications are for tracker mortgages, but we certainly expect to see this percentage fall as the popularity of fixed-rate loans increase once again. There is little doubt however that the volatility caused by last year’s mini-budget has caused financial pain to millions of borrowers and that this financial pressure will continue for months to come.
Research has shown that borrowers prefer the certainty of fixed-rate mortgages. So, as we approach the 35th anniversary of the introduction of fixed-rate deals in the UK, I would expect that once the “financial crossover point” is reached, most borrowers will once again opt for the safe harbour that fixed-rate deals offer.
