Mortgage pain for contractor-borrowers on expiring fixed rates is incoming, if you don't act
With markets predicting massive rises in interest rates this year – five to six per cent in the coming weeks, and further increases next year, the implications for mortgage-holders are going to be quite significant.
And this considerable fallout is potentially going to hit you to some extent even if you start preparing as soon as you’ve finished reading this article! This week alone, virtually all lenders withdrew their fixed-rate products with little or no notice, writes John Yerou, CEO of Freelancer Financials.
We won’t hesitate, vows the BoE
First, the knife-edge context. The Bank of England has just announced it will “not hesitate” to change interest rates to achieve its objective of getting inflation under control. The BoE’s warning-type-intervention was necessary following the chancellor's tax-cutting Mini-Budget which has triggered financial turmoil in the UK and further afield, seemingly for trying to do too much, far too soon.
In terms of mortgages, as many as 600,000 fixed rate deals are due to end before the end of this year and bigger still, approximately 1.8million fixed rate deals are due to expire next year. Many of the borrowers tied to those deals are heading for a rise in their costs – and a steep rise at that, because hundreds of pounds -- even thousands -- are going to get heaped onto their monthly repayments. Are you one of those borrowers?
The upheaval means it is very important for contractor-borrowers whose fixed rate is coming to an end, to take action as early as possible.
It’s going to be a shock for many, many individuals, who don’t take action. Borrowers have got used to low, low interest rates, and a new reality is dawning with scant hope of a quick return in sight to the miniscule rates we’ve all benefited from. I dislike being the bearer of bad news, but honesty is the best policy: we absolutely cannot sugarcoat the reality of rising interest rates, higher costs, and financial wriggle room reducing down to uncomfortable margins.
Lenders pull fixed rate deals amid economic uncertainty
In the last few days, mortgage lenders have been pulling their fixed rate products (some without warning), amid whispers of an emergency base rate spike following the pound’s crash earlier this week to record lows. Furthermore, the sudden rise and volatility in ‘swap rates’ is making it difficult for lenders to price fixed rates.
Even before Mini-Budget 2022 on September 23rd, the mortgage market was chaotic; now it’s berserk. Swap rates for two-year products are now above five per cent. Compared to where we were a year or so ago, that’s insane.
What are swap rates?
Swap rates are an arrangement between two parties where they agree to exchange one stream of future interest payments for another, based on a specified principal amount. They are used by mortgage lenders to mitigate the interest rate risk in a fixed rate mortgage.
As swaps increase, fixed-rate mortgages typically rise too. On the other hand, if swaps fall, fixed-rate mortgages decrease.
When lenders price fix-rate mortgages, they buy a tranche of money at a certain rate and then lend it out at a rate, plus their margin. But if those rates are volatile and changing quickly, lenders can’t accurately calculate/predict the cost of funding, hence the reason for withdrawing fix-rate products.
Eventually, lenders will return with repriced fixed rates. But they will be much higher than before.
Frankly, until the Bank of England is forced to step in with another base rate hike to try and calm the money markets, lenders will chop and change rates until the swap rates settle. We do have chancellor Kwasi Kwarteng’s ‘Medium-Term Fiscal Plan’ in the diary -- for November 23rd. But, like last week’s fiscal event, it’s not being given full ‘Budget’ status.
How long will this uncertainty continue?
It’s important to note that fixed rate pricing is particularly affected by market sentiment and anticipation. Currently, there is still a lot of uncertainty in the markets with the ramifications of the ongoing war in Ukraine, the knock-effects on energy prices and supply, inflation and volatility in the wider world. All things that are out of any one government’s control.
However, the consensus among experts is that swap rates are expected to increase then stabilise.
What should contractor-borrowers do?
Contractors who are mortgage-holders and whose fixed rate mortgages are coming to an end in the next six-to-eight months should very strongly consider engaging the services of a mortgage broker. And early. It is vital to make an informed decision given how quickly the market is changing; you need to get the fullest product choice possible and — don’t forget — with a top broker, you get to do all this with an expert adviser whose sole job is to stay on top of all things mortgage-related specific to your needs.
If you’re reading this with concerns about rising mortgage rates or have queries about your fixed rate ending within the next six-to-eight months, please contact Freelancer Financials, to lock in a new rate up to six months in advance. Acting now may make all the difference.
Find out more about contractor mortgages here.