Despite interest rates rising to 4%, mortgage opportunities abound for contractors

It’s always darkest before the dawn, or so historian Thomas Fuller would have us believe. Despite him coining that phrase in 1650, it’s so apt for the mortgage market right now, in 2023!

Much of the recent commentary on the UK mortgage sector has been relentlessly negative, but here’s the thing: so much of it is wrong! In fact, there are real reasons for optimism, writes John Yerou, CEO of Freelancer Financials.

Yes, the Bank of England recently raised the base rate to 4% (from 3.5%) in its fight to bring inflation under control. But in contrast, strong competition among lenders to attract new business early in 2023 implies positive indicators of recovery.  

Why the focus on variable rates has skewed our focus

To date, commentators have placed too much emphasis on lenders’ standard variable rates (SVRs) reaching 6-7%. SVRs have traditionally been short-term solutions, with many borrowers typically sitting on them until better rates become available.

But the majority of borrowers in the UK aren’t on SVRs! They’re on fixed-rate mortgages and need only really concern themselves with SVRs when they need to remortgage.

To that end, increasing numbers of options provided by keenly-priced products are appearing for borrowers. We’re now seeing lenders offer fixed interest rates at under 4 %, and they’re still coming down!

How has the mortgage market reacted to the BoE interest rate rise?

From what we’re seeing, the market has hardly flinched since the bank’s decision on February 2nd to raise the base rate by half a per cent.

The market wholly expected this most recent rise to 4% -- being the tenth in succession. But from that most recent vote, there are signs of opinion changing on the bank’s Monetary Policy Committee (MPC).

Two members now believe the base rate is too high. One MPC member, Silvana Tenreyro, reportedly told the Treasury Committee:

“It took time for changes to the bank base rate to feed through to the real economy and so far, just a fifth of the impact has been felt”.

Tenreyro now believes that monetary policy is doing enough to meet the BoE’s aim of bringing inflation down to its target rate of two per cent, hence her vote against the latest rise.

Interest rates may rise further yet -- but one bump, or two?

Many mortgage brokers support Tenreyro’s stance, including me. Monetary policy was doing enough to meet the aim of bringing inflation significantly down. Unless another big global shock happens, many chief economists believe a fall in inflation is guaranteed. Eventually.

Even so, two out of nine is still a minority (on the MPC). As such, the financial markets’ expectations are that the BoE base rate may yet rise to 4.5 per cent, but maybe as a result of 2 0.25% increases, rather than a single .50% rise.

What’s actually happening on the ground? 

Even before the BoE announced the latest raise, lenders had already taken strides to factor it into their rates.

The Feb 2nd decision will, however, see the cost of borrowing increase for borrowers on SVRs and tracker mortgages across the UK. But fixed-rate mortgages will remain, to a greater extent, unaffected.

There are already signs that the worst is past. The market has picked up again; buyers and sellers who delayed remortgaging when rates were highest are jumping on current rates.

What we’ve seen over the past few weeks is a raging price war between lenders with fixed rates falling daily. And this week, we saw the first re-introduction of sub-4% fixed rate deals appear (since September 2022).

Mortgage rates were already on a downward path late last year following the turmoil of September’s mini-Budget. This trend has continued since and has trickled into February.

One reason for the trend is that medium-to-long-term swap rates, which factor heavily in determining mortgage rates, have continued to improve. This movement has given lenders greater confidence, and has resulted in the more competitive fixed-rate mortgage products our contractor clients are now taking advantage of.

A new norm...

For those of you wondering if now’s the right time to pounce on your property of choice, let me just reiterate what I said last month. We are categorically not going to see fixed-rate mortgages priced at sub-2%.

In truth, we’ll be lucky to see sub-3 % rates return, even if inflation reaches its 2% target. The general consensus among brokers is a gentle optimism that mortgage interest rates will settle between 3.5% to 4.5%.

It’s a similar story with house prices. It was obvious we’d see a correction following the turbulence and uncertainty late last year. But much of this has already happened, and we’re not (and never were) going to see the 20% crash in housing stock that many ‘experts’ predicted.

All this means that if we’re not at the ‘new normal’ already, we’re not far away from it (failing another global disaster landing).

Neither house prices nor mortgage rates look likely to drop off a cliff any time soon, so contractors – you can proceed with a level of impunity we’ve not seen in a while.

Final thought

The caveat is, as always, what’s best for you will be determined by where your current rate and fixed-term mortgage are now. For specific advice, talk to your specialist broker about your aspirations, and take it from there. We’re happy to have that conversation with you.

Find out more about contractor mortgages and get in touch with Freelancer Financials here.