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What to Do If Your Mortgage Rate Jumps · Merryn Talks Money

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Speaker 1: Bloomberg Audio Studios.
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Speaker 2: Podcasts.
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Speaker 3: Radio.
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Speaker 2: News.
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Speaker 3: Welcome to Merrin Talks Your Money, the personal finance edition
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Speaker 3: of Merrin Talks Money. In these bonus podcasts, we talk
0:25
Speaker 3: about the best strategies for making the most of your money.
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Speaker 3: I'm John Stebbick, senior reporter and author of the Money
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Speaker 3: Distilled newsletter. I'm in this week while Merrin's away.
0:33
Speaker 1: Now, earlier this week.
0:36
Speaker 3: It was revealed that the average interest rate on a
0:38
Speaker 3: new five-year fixed mortgage deal had hit 6% for the
0:41
Speaker 3: first time.
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Speaker 1: In three years.
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Speaker 3: Now, this is not the deal that most people get.
0:47
Speaker 3: Most of us get the best buying mortgages. But on
0:49
Speaker 3: that front, what really caught my eye was that in
0:52
Speaker 3: the past month, the number of sub-5% fixed rate mortgage
0:56
Speaker 3: deals has collapsed from something like 1,500 to nearly zero.
1:01
Speaker 3: So it's very obvious that rates have gone up significantly.
1:04
Speaker 3: So for today's personal finance discussion, I wanted to get
1:07
Speaker 3: some clarity on why this has happened, the current state
1:11
Speaker 3: of the mortgage rate, the kind of things that are
1:13
Speaker 3: driving rates just now, and what you should do about it,
1:17
Speaker 3: particularly if you're coming up to refinancing your mortgage in
1:20
Speaker 3: the next six months or less. Joining me to discuss
1:24
Speaker 3: this is Anthony Emerson. Anthony's the director of Mortgage Brokers
1:28
Speaker 3: Trinity Financial, which is a London-based firm that specialises in
1:31
Speaker 3: bespoke mortgage advice. He last appeared on the show in May,
1:35
Speaker 3: and before that, he was an expert voice in our
1:37
Speaker 3: How to Buy a House series. Welcome back to the show, Anthony.
1:40
Speaker 2: Thank you, John. Pleasure being on again.
1:43
Speaker 1: It's really good to have you back.
1:44
Speaker 3: You last came on in May, and since then, things
1:48
Speaker 3: have got even more exciting for the mortgage market. So
1:53
Speaker 3: I remember the last time you were on, you were
1:55
Speaker 3: reminding us that at the start of the year, you
1:57
Speaker 3: could get a two-year fixed rate mortgage for about 3.6%.
2:01
Speaker 3: And when you came on in May, that had jumped
2:03
Speaker 3: up to 4.7%. And since then, we've had a bit
2:07
Speaker 3: of a brief lull, but one of the most eye-catching
2:09
Speaker 3: statistics that was from Moneyfacts, which is obviously a data provider,
2:15
Speaker 3: in the past month, as everyone's been freaking out about
2:19
Speaker 3: global bond markets again, the kind of number of sub 5%
2:22
Speaker 3: fixed rate deals has dropped from around 1,500 to almost zero.
2:27
Speaker 3: I think they said there's exactly nine deals excluding Northern Ireland,
2:32
Speaker 3: which is a slightly different system.
2:34
Speaker 1: So what's going on there? What's happening?
2:37
Speaker 3: And also, how can we get one of those sub 5%
2:40
Speaker 3: deals if we need to?
2:42
Speaker 2: The mortgage market has changed significantly. We have lenders repricing
2:47
Speaker 2: sometimes once or even possibly twice a week. because the
2:52
Speaker 2: Sonia swap rates are changing quite dramatically. We're in this
2:57
Speaker 2: very strange period where a lot of people think that
3:01
Speaker 2: the Bank of England base rate is what controls interest rates.
3:05
Speaker 2: And the Bank of England base rate hasn't moved. So
3:08
Speaker 2: we've been at 3.75 from the beginning of the year
3:11
Speaker 2: through to now. And the oil crisis that kicked off
3:16
Speaker 2: as part of the Iranian war has caused a lot
3:20
Speaker 2: of the sort of swap rate markets and the guilts,
3:24
Speaker 2: which really derives fixed rate mortgages in particular, to change
3:29
Speaker 2: quite dramatically. And the speed at which they change caught
3:33
Speaker 2: everyone off guard. So we have now seen, you know,
3:38
Speaker 2: those rates at 3.6 that I mentioned in sort of
3:41
Speaker 2: my last meeting with you now being closer to, you know,
3:46
Speaker 2: five mid fives um the average swap rate the average
3:51
Speaker 2: two-year fixed rates and the average five-year fixed rate that
3:54
Speaker 2: money facts quotes is taken from a very wide range
3:59
Speaker 2: of products the average person on the street is still
4:03
Speaker 2: getting considerably better rates than that so you know we
4:07
Speaker 2: have like you say got around about three or four
4:09
Speaker 2: lenders that are still offering deals at below five percent
4:14
Speaker 2: you generally have to be a high earner and be
4:17
Speaker 2: a premier banking customer relationship with them to be able
4:22
Speaker 2: to qualify for them. But things are not quite as
4:26
Speaker 2: bad as that headline-grabbing interest rate that you mentioned.
4:31
Speaker 3: Well, it seems to actually, I mean, because that's another
4:34
Speaker 3: good point there, because I remember there was a point,
4:37
Speaker 3: even after this kind of more chaotic period or the
4:41
Speaker 3: higher interest rate period we've gone into, But, you know,
4:43
Speaker 3: at the start of the year, maybe a year and
4:46
Speaker 3: a half ago, your deposit didn't make as much difference
4:51
Speaker 3: to the interest rate you were offered as perhaps it
4:54
Speaker 3: does now. So I'm kind of wondering, if I've just got,
4:57
Speaker 3: let's say, a 10% deposit now and I'm a first-time buyer,
5:00
Speaker 3: what are the kind of rates I'm looking at compared
5:02
Speaker 3: to somebody with, you know, 40% who's kind of either
5:06
Speaker 3: remortgaging or moving house?
5:09
Speaker 2: I mean, I looked at that before we started the
5:13
Speaker 2: conversation today, and if you had a 10% deposit on
5:18
Speaker 2: a property, interest rates would start at around about 5.40%
5:21
Speaker 2: for a two-year fixed rate.
5:25
Speaker 1: Yes, that's quite a big difference.
5:28
Speaker 2: It is quite a big difference, but when you consider
5:30
Speaker 2: that the sort of 60% loan-to-value is priced at around
5:35
Speaker 2: about 5%, it's not dramatically bigger. Yeah. It's still manageable
5:41
Speaker 2: and it's still encouraging as many first-time buyers to get
5:45
Speaker 2: into the market as possible. At 95% loan-to-value, where you're
5:50
Speaker 2: only putting down a 5% deposit, interest rates are currently
5:54
Speaker 2: starting at around about 5.74, 5.75. So that's your highest
6:00
Speaker 2: risk margin for the lender and the difference between the 60%
6:06
Speaker 2: where it's the cheapest products and the highest range at 95%
6:11
Speaker 2: is around about 0.85 of a percent, which it's large,
6:16
Speaker 2: but it's not eye-wateringly large. Yeah.
6:19
Speaker 3: So this is interesting as well, because is it fair
6:22
Speaker 3: to say that banks still seem, there's not a panic here.
6:26
Speaker 3: This is just repricing, isn't it? Because they're still happy
6:29
Speaker 3: enough to lend to people. And the multiples, I'm right
6:33
Speaker 3: in thinking that there's still getting slightly more relaxed about
6:37
Speaker 3: the terms in which they'll lend to people in terms
6:39
Speaker 3: of kind of level of income and that sort of thing?
6:43
Speaker 2: It's more generous now than it has been in the past.
6:46
Speaker 2: I mean, we have more and more lenders, particularly if
6:49
Speaker 2: you're a first time buyer, lenders are sort of pushing
6:52
Speaker 2: the envelope quite far and sort of lending five and
6:55
Speaker 2: a half, sometimes even six times your income. Now, Once
7:00
Speaker 2: you go beyond five times your income, you're starting to
7:02
Speaker 2: sort of stretch things a little bit too thin. And obviously,
7:06
Speaker 2: these higher interest rates make borrowing that amount of money
7:09
Speaker 2: a little bit more difficult for you to be able
7:12
Speaker 2: to fund the monthly payments. If you are, however, young
7:16
Speaker 2: and you can stretch it out over a 40-year term,
7:19
Speaker 2: those monthly payments are decent and We're still having conversations
7:25
Speaker 2: even today where those monthly premiums, if you're young and
7:29
Speaker 2: you can take a 14-year term, are actually comparable to
7:33
Speaker 2: what they were paying in rent. Maybe a little bit more,
7:36
Speaker 2: but you have to understand that there's an element of
7:38
Speaker 2: capital repayment built into that payment where in rent there
7:42
Speaker 2: is none.
7:43
Speaker 1: Yeah.
7:44
Speaker 3: That's an interesting point because, I mean, I do remember, again,
7:47
Speaker 3: when you last came on, there was a sense that
7:50
Speaker 3: the cost of renting versus ownership was.
7:53
Speaker 1: sort of on a par.
7:55
Speaker 3: Um, and then if you take the capital gains element
7:58
Speaker 3: and then you're still, as you say, paying off the
8:01
Speaker 3: loan over time is rent, obviously it's perpetual. How would
8:04
Speaker 3: you say that balance has shifted in favor of renting
8:08
Speaker 3: over the last four months or in favor of buying
8:11
Speaker 3: or not that much to it?
8:13
Speaker 2: Because of the fall in the number of rental properties
8:18
Speaker 2: becoming available now, um, you know, the renters reform actors
8:21
Speaker 2: had that unintended, um, Consequence of.
8:24
Speaker 3: Unintended, predictable consequence to anyone but a politician.
8:28
Speaker 2: Well, predictable to anyone who was in the market, unpredictable
8:31
Speaker 2: to those in control, it would seem. But the Renters
8:36
Speaker 2: Reform Act and all those other influences, lack of properties
8:40
Speaker 2: on the market, has caused rents to continue to rise
8:43
Speaker 2: at a steady clip. And because of that, we are
8:47
Speaker 2: not as far off that par sort of calculation that
8:52
Speaker 2: we were back in May. because rentals have continued to increase.
8:57
Speaker 2: So personally, I think if you are a first-time buyer
9:02
Speaker 2: and you're looking at it, I would definitely have a
9:04
Speaker 2: conversation with a mortgage broker to find out what your
9:07
Speaker 2: borrowing capacities are, to have a look at what the
9:09
Speaker 2: interest rates and the payments might be, and then make
9:12
Speaker 2: that decision as to whether or not you want to
9:13
Speaker 2: go down that road. And I say that because of
9:16
Speaker 2: the fact that at the moment we have Flats in
9:20
Speaker 2: particular being very, very competitively and significantly lower than they
9:25
Speaker 2: were at their peak. So if you're looking at, is
9:29
Speaker 2: it the right time to buy? The right time to
9:31
Speaker 2: buy is always before it hits the bottom. And we
9:35
Speaker 2: have dropped a fair amount. And I would probably say
9:39
Speaker 2: to you that we are nearing that point. And it
9:41
Speaker 2: might be worth those first time buyers actually doing that
9:44
Speaker 2: calculation and seeing whether or not we can facilitate what
9:48
Speaker 2: they need.
9:50
Speaker 1: That's interesting.
9:50
Speaker 3: In terms of the flats specifically, I mean, obviously there's
9:54
Speaker 3: a lot of factors affecting the market there. What do
10:01
Speaker 3: people need to watch out for if they are considering
10:05
Speaker 3: a flat? What is it that's actually driven? Because basically,
10:09
Speaker 3: if you look at property statistics, you've got your super
10:12
Speaker 3: prime market, which has fallen, and you've got the market
10:17
Speaker 3: for normal family houses increasing. is basically flat. It's not
10:22
Speaker 3: really suffered, particularly relative to the rest of the market.
10:26
Speaker 3: And in some parts of the country, it's still ticking higher.
10:30
Speaker 3: So what is it about flats that has kind of
10:33
Speaker 3: caused this? Because it is pretty significant drops, isn't it?
10:37
Speaker 2: Relative, you know, very, very significant drops. Yeah. I think
10:42
Speaker 2: it's a supply and demand issue. New developers are definitely
10:46
Speaker 2: not rebuilding houses anymore. They are building flats because of
10:49
Speaker 2: the number of units that they can get onto the land.
10:53
Speaker 2: The government is trying to hit its million plus new
10:59
Speaker 2: developments in their parliament. And we've also got a huge
11:05
Speaker 2: amount of landlords. I mean, a survey the other day
11:09
Speaker 2: done by the National Landlords Association said that of their survey, 48%
11:13
Speaker 2: or so of their landlords intend to sell within the
11:18
Speaker 2: next 12 months or when their mortgage comes up for renewal.
11:23
Speaker 2: And two reasons. Number one, that mortgage that's coming up
11:26
Speaker 2: for renewal is probably at an interest rate at somewhere
11:28
Speaker 2: around 1% to 3%. And that could be going on
11:33
Speaker 2: to a sort of 5% to 6% interest rate. So
11:37
Speaker 2: that gives them thought to change all the taxation reasons
11:41
Speaker 2: that have hit landlords. and all these new rules and regulations.
11:46
Speaker 2: So we are seeing that we have more flats on
11:50
Speaker 2: the market than we have buyers for them at the moment.
11:54
Speaker 2: And I think people have been holding off on buying
11:57
Speaker 2: flats because they think, oh, that market's falling, so I'm
12:00
Speaker 2: just going to wait for it to go. But I
12:02
Speaker 2: think we are at that point where things are starting
12:05
Speaker 2: to look interesting and worth getting involved in because I
12:10
Speaker 2: don't think that they can fall much further without sort
12:14
Speaker 2: of triggering a bit more of a wider problem.
12:18
Speaker 1: That's interesting.
12:18
Speaker 3: I mean, in terms of a wider problem, do you
12:22
Speaker 3: mean negative equity and kind of knocking on to the.
12:25
Speaker 2: I think those who bought these properties in the last
12:29
Speaker 2: sort of five years are possibly looking at not quite
12:32
Speaker 2: getting their money back. I've had a number of those
12:36
Speaker 2: conversations with people. So they most certainly haven't made anything
12:40
Speaker 2: out of these properties. People who've bought them within the
12:44
Speaker 2: last 10 years are going to be making a significantly
12:47
Speaker 2: smaller profit margin. And people who've owned them for ages
12:53
Speaker 2: are probably going to be worried about the changes that
12:56
Speaker 2: are going to happen to capital gains taxes.
13:10
Speaker 3: Have you had any conversations about how the prospect of
13:12
Speaker 3: leasehold reform is affecting those flats in particular? Because I'm
13:17
Speaker 3: aware the government's kind of planning to bring this in,
13:23
Speaker 3: but to an extent it strikes me that leaves people
13:25
Speaker 3: who've got existing leaseholds with an asset that's potentially worth
13:31
Speaker 3: less because it's encumbered by these issues, whereas the new
13:34
Speaker 3: flats possibly won't be.
13:37
Speaker 2: That is a very small part of it because I
13:41
Speaker 2: think the people that are holding out for that are
13:44
Speaker 2: just hoping for the best. We have seen a lot
13:48
Speaker 2: of people just extend their leases because of the fact
13:51
Speaker 2: that they need to for matters of finance and sale
13:55
Speaker 2: and things like that. But the government doesn't move too
13:59
Speaker 2: quickly on this point. We've been having this discussion on
14:03
Speaker 2: leasehold reform now for many, many years and we are
14:07
Speaker 2: yet to see any of the terms and conditions as
14:09
Speaker 2: to what they think they're going to put in place.
14:11
Speaker 3: So yeah, so with in mind that one should be
14:13
Speaker 3: careful with service charges, cladding issues and leasehold and all
14:16
Speaker 3: the rest of it, now might be a good time
14:18
Speaker 3: for a buyer armed with a lawyer they feel they
14:21
Speaker 3: can trust to maybe take a look at the flat market.
14:24
Speaker 2: Yeah, I think, you know, if you are buying flats
14:27
Speaker 2: and things like that, the ground rent and service charge
14:30
Speaker 2: is two of your biggest things that you need to
14:32
Speaker 2: look out for. Some of them can be relatively astronomical
14:37
Speaker 2: and they never ever go down they never get more.
14:41
Speaker 3: Expensive yeah well this this is the problem so if
14:44
Speaker 3: yeah if you can find common hold and obviously if
14:46
Speaker 3: you're outside england and wales this isn't actually a an
14:49
Speaker 3: issue um because obviously as you can tell from my
14:52
Speaker 3: accent from scotland where we don't really have leasehold as
14:55
Speaker 3: a as a thing and looking at the prime london
14:59
Speaker 3: properties was another eye-catching stat from savills this week which
15:03
Speaker 3: was basically the prime london properties fallen by 27 percent
15:08
Speaker 3: in nominal terms since 2014 and i'm just wondering that
15:12
Speaker 3: that kind of top end of the market what are
15:15
Speaker 3: you seeing there what is it that's well a kind
15:18
Speaker 3: of why have we seen that significant a drop over
15:21
Speaker 3: that time but also is there any sense that that
15:24
Speaker 3: might turn around, that the kind of world's super rich
15:27
Speaker 3: might start to think, oh, wait a minute, this stuff's
15:30
Speaker 3: starting to look cheap, you know, it's property in Mayfair
15:32
Speaker 3: or whatever, or is it a bit too early and
15:35
Speaker 3: a bit too politically sensitive for that?
15:38
Speaker 2: Personally, I think that the very top end of the
15:40
Speaker 2: market has been hit by a lack of confidence in
15:44
Speaker 2: the direction of travel of the UK government. Yeah. Those
15:49
Speaker 2: individuals are very, mindful of of taxation issues are very
15:54
Speaker 2: mindful of um the way that they are treated within
15:59
Speaker 2: our economy and i think for that reason we are
16:03
Speaker 2: seeing a fall because of the fact that there are
16:05
Speaker 2: less people interested in investing into that asset when you've
16:09
Speaker 2: got other areas of the world that are looking a
16:11
Speaker 2: lot more attractive.
16:13
Speaker 3: Yeah so basically it's sort of part of the whole
16:15
Speaker 3: wealth exodus issue a to mere mortals um you know
16:24
Speaker 3: if if you own a house just now and you've
16:28
Speaker 3: got a mortgage and you were lucky enough to be
16:31
Speaker 3: one of the last people to get onto a one
16:34
Speaker 3: to two percent loan the kind of tail end of
16:39
Speaker 3: 2021 early 2022 and you're now staring down the barrel
16:42
Speaker 3: of like five percent remortgaging What should you be doing?
16:47
Speaker 3: What should you be thinking if you're coming up to
16:49
Speaker 3: refinancing within the next year or the next six months?
16:54
Speaker 2: I think the first thing to do, John, is don't panic.
16:58
Speaker 2: It's easy for you to say. We are seeing a
17:03
Speaker 2: significant mortgage shock as being a major part of our
17:07
Speaker 2: conversation piece with clients. And how do we mitigate that
17:11
Speaker 2: payment shock? And there is a number of different ways
17:14
Speaker 2: that we can look at it, and we can possibly
17:17
Speaker 2: extend the mortgage term, which would then allow that client
17:20
Speaker 2: to have a longer period to pay it back, which
17:23
Speaker 2: would make your monthly premiums lower. We could possibly consider,
17:27
Speaker 2: if applicable, using part interest only, part capital repayments, or
17:32
Speaker 2: even possibly go as far as full interest only in
17:34
Speaker 2: order to make those payments similar to what they were
17:39
Speaker 2: paying before. Quite a few people who took those mortgages
17:45
Speaker 2: five years ago might have had children. Some of them
17:48
Speaker 2: might be having school fees and things like that. And
17:52
Speaker 2: people are making changes to the way that they take
17:56
Speaker 2: that mortgage out in order to try and keep their
17:58
Speaker 2: payments the same so that they can afford the same
18:00
Speaker 2: quality of life. Unfortunately, people who are on interest-only mortgages
18:05
Speaker 2: are seeing the greatest payment shock because of the fact
18:09
Speaker 2: that it's a direct correlation between interest rates and monthly
18:13
Speaker 2: payments because there is no capital repayment element to it.
18:17
Speaker 2: People who are on a capital repayment mortgage are seeing
18:21
Speaker 2: a much lower payment shock because of the fact that
18:25
Speaker 2: the way that the curve works, it softens the blow
18:28
Speaker 2: relatively significantly. So rather than it being three times, four
18:33
Speaker 2: times more expensive as it would be with an interest-only mortgage,
18:36
Speaker 2: the capital repayment client is seeing only a change to
18:40
Speaker 2: what they were paying before, maybe £ 500, £ 600, £ 700 on
18:44
Speaker 2: their maybe £ 1, 200 mortgage that they were paying before, which
18:47
Speaker 2: is a lot more manageable than being asked for three
18:52
Speaker 2: to four times that figure.
18:53
Speaker 3: Actually, just something you raised, do you still see many
18:57
Speaker 3: people coming and rolling off of interest-only mortgages when they're
19:00
Speaker 3: actually home owners as opposed to landlords? Because that's relatively unusual.
19:07
Speaker 2: We have a lot of interest-only clients because of the
19:10
Speaker 2: fact that we have certain clients who are quite heavily
19:14
Speaker 2: incentivized with big bonuses.
19:17
Speaker 1: Of course, yeah.
19:18
Speaker 2: And from a month-to-month point of view, let's just say
19:22
Speaker 2: you get rather large bonuses in hundreds of thousands, but
19:26
Speaker 2: your basic salary is $ 100, 000. Yeah. Being able to do
19:30
Speaker 2: a capital repayment mortgage with your $ 100, 000 monthly salary is
19:33
Speaker 2: a little bit more tricky than being able to do
19:35
Speaker 2: it with an average of that whole number. So with
19:39
Speaker 2: interest only mortgages, those clients then make a lump sum
19:42
Speaker 2: reduction at the end of that financial year, or they
19:44
Speaker 2: invest that money elsewhere. In the past, when interest rates
19:48
Speaker 2: were 1% or 2%, elsewhere they could get a better yield.
19:52
Speaker 2: So they were investing that money into other assets, which
19:56
Speaker 2: would give them a higher yield and they'd maintain their
20:00
Speaker 2: interest-only mortgage at 1% and be quite comfortable. Now those
20:05
Speaker 2: yields are a little bit more difficult to get an
20:08
Speaker 2: after-tax yield at 5%. And we are seeing significant reductions
20:13
Speaker 2: in those mortgages by people sort of cashing in those
20:16
Speaker 2: investments and those other assets that they have and lowering
20:21
Speaker 2: the amounts of their mortgage. But it is still a
20:24
Speaker 2: very popular part of the mortgage conversation for your higher owners.
20:38
Speaker 3: In terms of the practicalities as well, so the last
20:42
Speaker 3: time we were talking specifically about if you are coming
20:46
Speaker 3: up to the end of a deal, any time up
20:50
Speaker 3: to six months and preferably basically as soon as possible,
20:53
Speaker 3: you should start talking to your mortgage broker. Is six
20:55
Speaker 3: months about right?
20:57
Speaker 2: Six months is the earliest that we can put anything
21:01
Speaker 2: in place because a remortgage product is only valid for
21:04
Speaker 2: a six-month period as a maximum. And that's because the
21:07
Speaker 2: lender has to put that money aside in readiness for
21:11
Speaker 2: you to draw down on those funds. And they don't
21:13
Speaker 2: want to put them aside in perpetuity. They want to
21:16
Speaker 2: have a defined timeline. If you don't use it within
21:19
Speaker 2: that period, the money comes back into the flow and
21:22
Speaker 2: away it goes. The biggest thing for us is start
21:26
Speaker 2: early and start having the conversation early around about six
21:30
Speaker 2: and a half months out, start having the conversation with
21:33
Speaker 2: your mortgage broker so that you know that you can
21:35
Speaker 2: put together all the paperwork, documents, et cetera, ready to
21:39
Speaker 2: go at the point where you are six months out.
21:42
Speaker 2: You then apply for that mortgage, you get something in hand,
21:45
Speaker 2: you are not committed to take that mortgage out. You
21:49
Speaker 2: can walk away from it, you can cancel it, you
21:51
Speaker 2: can change it to a lower deal if a lower
21:53
Speaker 2: deal becomes available, you can change lender over the course
21:57
Speaker 2: of the six months. But what we're saying to people is,
22:00
Speaker 2: don't hang about, grab something now, put it in the
22:03
Speaker 2: back pocket, safe and secure so that you know what
22:06
Speaker 2: you are going to pay. And if things improve, fantastic. However,
22:11
Speaker 2: if things go the opposite direction, you've done the best
22:15
Speaker 2: you can at the earliest point that you could. And
22:19
Speaker 2: the poor mortgage broker might need to re-broke that mortgage
22:22
Speaker 2: three or four times over the course of the next
22:24
Speaker 2: six months, but that's pretty much why we exist.
22:29
Speaker 1: Well, they make you earn your money.
22:32
Speaker 2: True Scottish.
22:34
Speaker 1: Exactly, exactly.
22:36
Speaker 3: I mean, in terms of, obviously you shouldn't ever be
22:38
Speaker 3: betting your future on what might happen to interest rates,
22:42
Speaker 3: but this also does feel like a particularly difficult time. Even,
22:46
Speaker 3: you know, looking back, certainly I find it very hard
22:51
Speaker 3: to have any kind of level of high conviction as
22:54
Speaker 3: to what might happen to rates next. So what are
22:58
Speaker 3: you telling clients in terms of the choice between fixed
23:01
Speaker 3: and variable rate mortgages? Because obviously you can still get
23:04
Speaker 3: variable for what, about half a percentage point less than
23:09
Speaker 3: the fixed?
23:10
Speaker 2: It's widened of late. When I was looking at them
23:13
Speaker 2: yesterday and having a conversation with various different clients, the
23:16
Speaker 2: margin had widened up on two conversations. One of them
23:19
Speaker 2: was 0.78 of a percent. The other one was over
23:23
Speaker 2: 0.9 of a percent. So effectively a tracker rate now
23:27
Speaker 2: has three Bank of England base rate rises available within
23:33
Speaker 2: it until you get to the point where you are
23:35
Speaker 2: starting to match the available two-year fixed rate. So if
23:41
Speaker 2: you've got people who are a little bit more open
23:46
Speaker 2: to taking the risk, because obviously trackers are more risky
23:49
Speaker 2: because it might not stop at three Bank of England
23:52
Speaker 2: base rate rises. It might continue beyond that. In which case,
23:56
Speaker 2: if you sort of decide, actually, no, I can't handle this.
24:00
Speaker 2: I want to dive out of it into a fixed rate.
24:02
Speaker 2: You have to take whatever the market's offering at that point,
24:05
Speaker 2: which could be anything. However, given that swap rates have
24:09
Speaker 2: moved so significantly, and as you see, they're not linked
24:13
Speaker 2: directly to the Bank of England base rates, they might
24:17
Speaker 2: remain at this level where you could take this tracker rates,
24:22
Speaker 2: be on a much lower rate initially, and then gradually
24:25
Speaker 2: increase that rate as the Bank of England increases its
24:29
Speaker 2: rates up to try and control inflation. Because that's the
24:33
Speaker 2: Bank of England's job, is that it tries to use
24:35
Speaker 2: the Bank of England base rate to control inflation, and
24:38
Speaker 2: the swap rates are based off the confidence in the
24:43
Speaker 2: market for people to lend, the various different institutions to
24:47
Speaker 2: lend each other money, and they forward price based on
24:50
Speaker 2: a two-year or five-year or 10-year modeling of where they
24:54
Speaker 2: think interest rates are, which is why the swap rates
24:56
Speaker 2: have risen and gilt rates have risen so significantly compared
25:01
Speaker 2: to the Bank of England base rate, which has remained stable.
25:03
Speaker 2: But the track of fixed conversation is a difficult one
25:07
Speaker 2: because it does come down to the client's attitude to risk.
25:12
Speaker 2: If you are, you know, got a mortgage that's infinitely affordable,
25:16
Speaker 2: maybe only sort of three times your available income multiple,
25:20
Speaker 2: then you've got more sort of capacity to take on
25:23
Speaker 2: that extra risk in case something goes wrong. If you're
25:26
Speaker 2: trying to borrow five and a half times your income
25:28
Speaker 2: on a tracker rate, it might be a little bit
25:30
Speaker 2: more risky if things start to go the opposite way.
25:34
Speaker 3: Yeah, so basically you just have to model how much
25:36
Speaker 3: your monthly payment would go up to in a worst
25:39
Speaker 3: case scenario, I guess.
25:41
Speaker 2: And then, you know, being able to stress test that
25:44
Speaker 2: payment against your capacity and the way you want your
25:49
Speaker 2: lifestyle to be lived.
25:51
Speaker 3: And yeah, just one last question, actually, I wanted to
25:54
Speaker 3: kind of pick up. This new help to buy policy
25:59
Speaker 3: that the government is looking at or is going to announce,
26:02
Speaker 3: your first home, enabling people to buy with a 2.5%
26:07
Speaker 3: deposit and a 20% equity loan from the government.
26:11
Speaker 1: Have you any thoughts on.
26:13
Speaker 3: How that will affect the market this time round? Because
26:16
Speaker 3: obviously it's quite a different set of circumstances from when
26:19
Speaker 3: help to buy came out in 2012, I think it was, 2013.
26:24
Speaker 2: The fact that these are looking like they're going to
26:28
Speaker 2: be restricted to new builds only, that policy looks to
26:33
Speaker 2: me like it's being used to get the builders to
26:37
Speaker 2: use the land banks that they've got to be able
26:39
Speaker 2: to develop the houses in order to try and meet
26:41
Speaker 2: the one point something million homes that they want. Is
26:46
Speaker 2: it the right thing for the overall general public? Probably
26:51
Speaker 2: not because if you flood one part of the market,
26:55
Speaker 2: it has unintended consequences on the rest of that marketplace.
27:00
Speaker 2: It's really good for developers. It's really good to try
27:02
Speaker 2: and get Britain building again. But those builders will only
27:07
Speaker 2: build at a point where they feel that they can
27:09
Speaker 2: get the price they want and need for development to
27:13
Speaker 2: be financially worthwhile. We are still in a world where
27:18
Speaker 2: those costs of build and materials and labor and all
27:23
Speaker 2: the other bits and pieces are quite a lot higher
27:26
Speaker 2: than they used to be. And it's hard for them
27:29
Speaker 2: to be able to make their margin. So I think
27:32
Speaker 2: it will help, but I don't think it's going to
27:34
Speaker 2: help quite as much as that helped to buy it
27:36
Speaker 2: back in the day.
27:38
Speaker 3: I know this isn't your area of expertise necessarily, but
27:41
Speaker 3: what would you do in terms of, what do you
27:43
Speaker 3: think would be a better solution for encouraging builders to
27:48
Speaker 3: build without having to essentially dump all the negative equity
27:52
Speaker 3: risk on the first-time buyers?
27:54
Speaker 2: It's a very, very difficult one to solve, John, in
27:57
Speaker 2: my opinion, because of the fact that we have a
27:59
Speaker 2: massive oversupply of flats at the moment. And I think
28:04
Speaker 2: we have the buyers for them. But as I said
28:07
Speaker 2: to you earlier, I think those buyers are somewhat holding
28:09
Speaker 2: off at the moment with this belief that everything is
28:11
Speaker 2: going to get cheaper and cheaper and cheaper. And I
28:15
Speaker 2: think we've seen a significant move in the market. And
28:17
Speaker 2: I think we're at that point now where it might
28:20
Speaker 2: very well be worthwhile for these people to come out
28:24
Speaker 2: of hibernation and start getting involved in it. Until we
28:29
Speaker 2: get a sort of supply and demand balance... any of
28:35
Speaker 2: these sort of incentives are going to be lost. Because
28:40
Speaker 2: if you're only putting down a 2.5% deposit plus you
28:44
Speaker 2: are getting a 20% grant from the government, that's great.
28:49
Speaker 2: It helps you get onto the market. It all just
28:51
Speaker 2: depends on what the products look like that come with them.
28:54
Speaker 2: What are the price of them? How affordable are they?
28:57
Speaker 2: How do they compare to local rents? Because we need
29:00
Speaker 2: to reach that balance where it actually becomes worthwhile for
29:04
Speaker 2: somebody to get involved in it and most people you
29:07
Speaker 2: know these products tend to come with like a five-year
29:10
Speaker 2: lifespan they need to believe that they will be able
29:13
Speaker 2: to make a margin within that five years in order
29:15
Speaker 2: to make it worthwhile because two and a half percent
29:19
Speaker 2: is is very very small change in the property price
29:23
Speaker 2: for you to effectively fall into negative equity.
29:26
Speaker 3: Yeah especially if you're buying a new build because as
29:28
Speaker 3: soon as you walk into the new build it drops
29:30
Speaker 3: in value Especially in.
29:33
Speaker 2: The first year or so, but then it should then
29:35
Speaker 2: claw its way back up again. But when you've only
29:39
Speaker 2: got sort of two and a half percent deposit it
29:42
Speaker 2: doesn't have to fall by very much for you to
29:43
Speaker 2: be effectively negative equity in your share and your ownership of.
29:48
Speaker 3: That property yeah yeah and then you're stuck i.
29:50
Speaker 2: Think i think i think it's it's a it's a
29:52
Speaker 2: great idea with a couple of tweaks that need to
29:55
Speaker 2: be done anything that's you know stimulates the market i'm
29:59
Speaker 2: up for but it's just about trying to do it
30:02
Speaker 2: in the right way. It would be nice if that
30:05
Speaker 2: product was available for both new build and for secondhand
30:09
Speaker 2: homes so that we can get the whole market moving
30:12
Speaker 2: and not just doing it to benefit one person in particular,
30:16
Speaker 2: which is the developer.
30:18
Speaker 3: On that diplomatic note, Anthony, I really appreciate your time.
30:23
Speaker 2: Pleasure being on again.
30:23
Speaker 3: Thanks for listening to this week's Merrin Talks Your Money
30:30
Speaker 3: If you like our show, rate, review and subscribe wherever
30:32
Speaker 3: you listen to podcasts. Also be sure to follow Merrin
30:36
Speaker 3: and myself on X. Merrin's at MerrinSW and I'm John
30:41
Speaker 3: underscore Stephek. This episode was produced by Summer Sadi and
30:45
Speaker 3: Moses Andem. Questions and comments on this show and all
30:48
Speaker 3: our shows are always welcome. Our show email is merrinmoney
30:51
Speaker 3: at bloomberg.net. And a special thanks to Anthony Emerson.