Adam’s Market Insights – Mortgages, Mortgages, Mortgages

16th August 2023

Ok, so you are probably sick of hearing about mortgage costs by now. Everyone and their dog knows that the cost of borrowing money has increased substantially in 2023. Even people who do not own property will likely be aware of this. For several months, rate increases have become the norm, and in turn, this has affected the property market. In most cases, the increases are expected with news breaking of planned Bank of England (BOE) actions before they take effect. So just how much longer can this keep going? what does it all mean? And taking a step back; what can we predict about the rest of the year and into 2024?

If you already understand the relationship between inflation and interest rates, please feel free to skip ahead. However, to predict further changes with mortgages, it’s vital to understand the key factors and exactly what weights are on each side of the balancing scales.

Interest rates are directly linked to inflation. In periods of inflation, money loses value over the period it is borrowed, as the cost of goods and services increases in the meantime, by the time the funds are returned to the lender that money has less buying power, leaving a net loss to the bank. As such, interest rates are made up of two parts; the first is an amount to cover the predicted decline in value of the money borrowed for the duration of the loan, and the second part is the “real return” or the “real interest rate”. To simplify this, “real interest rate” can be considered the cost of borrowing funds, above the costs added to cover inflation. Simple.

For the past few months, the BOE has weaponised the base rate to tackle inflation. The idea being that by increasing the real interest rate, consumers will be encouraged to retain funds, rather than spend, thus decreasing the demand for goods and services, and therefore decreasing their costs… or at least slowing the rate of their inflation.

Ok, that’s the economic lesson over. So what’s going on now?

Well inflation is slowing. This week reports were released for July, outlining figures that were better than initially expected. Inflation slowed from 7.9% in June to 6.8% in July. It’s important to note that inflation was not reversed, simply the rate of inflation slowed, with July 2023 having had the smallest increase to the cost of living of any months since February 2022. So this is only a very early sign of improvement and there is a long way to go.

In my own opinion, there are two likely responses by the BOE if improvements continue. The first, and the prediction of the optimists, is that the base rate will fall. As we pass over the tip of the curve of inflation, the BOE may begin to lower rates in line with this recovery, or at the very least, stop the increases and allow their imposed changes to the activity of consumers to continue to take effect.

The pessimistic view is that the BOE will stomp their proverbial foot down onto the gas pedal. If it is viewed that their approach to tackle inflation is working, this could yet be the sign to push on with further measures.

Aside from the BOE base rate, it is VITAL to pay attention to the direct activity of lenders. Whilst the charges of individual lenders will always be intrinsically linked to the costs they are charge by the BOE (this is what the base rate represents), this again is not a one-factor equation. If inflation is slowing, then lenders are able to adjust their costs. As stated before, lenders anticipate inflation in order to choose their risk level and account for the money they receive back not being worth as much as that which they loaned. If inflation slows, the confidence of a lender can grow and these costs reduced. The wider media tends to pay most attention to the base rate as the single biggest indicator of mortgage costs, and whilst this is a very strong forecasting tool, in some cases it can be misleading…

The latest base rate announcement came on August 3^rd, with a 0.25% increase pushing the current rate to 5.25%. However, at the same time, major lenders were offering products at cheaper rates than previously; this was the first time that actual mortgage costs were reduced in 2023. With base rates under the microscope, it was widely reported that the costs of borrowing money were on the rise once again, yet in real terms, consumers were benefiting from better rates than they may have expected in the weeks prior.

So what next?

Well that depends on several factors as is hopefully evident by now. It is reliant on the Bank of England’s next steps and how they respond to the latest revised economic forecasts. It is reliant on inflation itself and the knock-on effect to the confidence of lenders. It is also dependant on straight forward competition. Whilst lenders may be more apprehensive than ever to loan funds, they are after all in the business of making money and need to price mortgage products competitively. To add to all this, the cost of mortgages is currently being quoted as one of the largest factors for property buyers re-assessing their plans, pulling out of purchases or reducing offers. As I have previously written, property values have by no means crashed as some wrongly predicted, though there has been a slight softening. This will also improve rates, with the property being a lower value, the sum of money borrowed is reduced, again reducing lender risk.

… or to summarise… who knows… there is a lot to account for…

One person who might know is Mr Richard Lucy of Finance Planning Group. I am delighted to have been working with Richard for some months now and have personally found his approach to be a breath of fresh air. Coapt is delighted to work in partnership with Richard, whose details are below, as well as a host of other mortgage brokers and financial professionals. For any questions or concerns relating to this subject, please do not hesitate to get in touch with myself or the wider team.

Richard Lucy MBA Dip PFS

Mortgage and Protection Adviser

T:   01444 449200 / 01273 525130

richard.lucy@financeplanning.co.uk