Property market in 2023 for contractors and their mortgage: in a nutshell
Mortgage rates shot up in the market chaos that followed the Mini-Budget 2022 in September, hitting heights of 6.75% in October. But at the time of writing, the rates have eased back, as lenders look to grab more business in the traditionally quiet new year.
As predicted in my previous article, lenders have been cutting interest rates across their fixed-rate mortgage deals, so contractors are understandably sitting up and taking notice, writes John Yerou, CEO of Freelancer Financials.
This cutting underlines lenders’ appetite for new mortgage business, even following sharp rises in the Bank of England base rate over recent months.
We’ve come a long way since November, but mortgage product shelf-life is now short
The average standard variable rate (SVR) continued to rise since my November article and now stands at 6.64% the highest level since November 2008 (when the financial crisis was underway). The current BoE rate is 3.50%, which was announced on December 15th 2022.
The good news? Well, product-choice has improved immensely for mortgage borrowers in the last few weeks, with offerings like five-year fixed rates as low as 4.15% and two-year fixed deals at 4.50%. But with take-up being high, these deals have a short shelf-life.
Trackers, (no) penalties and a very short window
Lenders are also offering tracker mortgages, with no penalties or tie-ins at the BoE base rate, plus 0.34% (so a total of 3.84%). This is a huge improvement on what was available just several weeks ago.
One word of warning, though: the average shelf life of mortgage deals has dropped to a record low. Any given deal lasts only 15 days before the lender withdraws it. This shows the very short window everyone in the industry is working in. For competitive deals below 5%, we’re seeing lenders pull them within only a few days of launch.
The shift towards short-term fixes
In recent weeks and months, our contractor clients have been opting for shorter-term fixed rate deals, on account of the expectation that rates will drop further. Even though rates have fallen substantially from their highs of 6.75% following the Mini-Budget -- in October by as much as 2%, borrowers still seem to want the flexibility of shorter-term deals to avoid being tied into what they consider to be overpriced fixed-rate deals.
Another reason for this trend is the hope that house prices will increase, boosting their equity stake ahead of remortgaging a couple of years down onto a lower rate. However, borrowers on higher loan-to-values (minimum equity of 5-10%) should seek independent advice before pursuing this strategy, especially given the unpredictable property market moving forward.
Why are lenders slashing their fixed rates when the BoE is raising the base rate?
The bank’s base rate affects lenders’ base rate trackers and their SVRs. For fixed-rate pricing, lenders take their cue from swap rates, which shows where the money markets believe rates will settle in the medium-to-longer term. As swaps increase, fixed-rate mortgages typically rise too. On the other hand, if swaps fall, fixed-rate mortgages decrease.
Medium-to-long-term swap rates have been falling since November’s Autumn Statement 2022, which has given lenders greater confidence to reprice their fixed-rate mortgage loans.
But even with this new confidence, one thing remains crystal clear: the age of sub-2% mortgage rates is over!
Currently, we expect mortgage rates to settle between 3.75% and 4.75% this year (and even that’s optimistic). Compared to other markets, it’s still pretty competitive.
Interest rates are returning to the old normal...
Throughout 2022, I’ve been warning that interest rates would go up. The era of cheap money couldn’t go on indefinitely. There’s a generation of borrowers who’ve become accustomed to cheap money, and they’re feeling the return to normal more keenly than their forebears.
Just recently, a close relative of mine (in his late thirties) told me he was anxious about what his monthly payments might be once his 1.29% fixed rate ends this summer.
“Higher,” I replied. Blunt, but there’s little point in dressing up the truth!
I felt his pain. But I did add that although these potentially scary rises are not what he was used to, in my view they are inevitable.
Perhaps the mortgage industry as a whole, including the Financial Conduct Authority (FCA), could have done more to educate borrowers that sub-2% interest rates were abnormally low. And that interest rates had to go up eventually.
What was the old normal?
Until the global financial crisis in 2008, interest rates had averaged 4.8% since the BoE was founded in 1694.
Although mortgage rates have been influenced by other factors over time, their fluctuating between 4% and 6% has never been seen as untoward.
Some financial analysts believe interest rates are still competitive relative to what banks are offering internationally. If you compare fixed rates offered in the US and Europe, the UK is still cheap.
At the start of the century, average mortgage rates by building societies were 6.8%. They then fell to about 5.7% just before the global financial crisis, which was the catalyst for the cheap money we’ve seen since 2009.
And here’s a sobering thought: the last time inflation was where it is today, mortgage rates were in double figures.
Housing market FAQs in 2023
Last month on our blog, we outlined why we thought November’s drop in house prices was no cause for panic. While the marginal downward trend continued into December, our outlook remains unchanged: the much-prophesied housing market crash is unlikely to happen unless something gargantuan swipes us from leftfield.
The reduced number of houses coming to market is just one factor certain to maintain the price of housing stock. But that throws up three conundrums:
- If you’re a first-time buyer, should you wait until interest rates drop further?
- Even if you want to move, should you wait until there’s more choice in the market?
- If you do stay, should you switch to your lender’s SVR or look to remortgage given that the current rates on offer are (probably) double the rate you took out your last deal?
All good questions, which I’ll answer one at a time, below:
Quick answer to Q1? The end of cheap money, part 1, is already here
As with the close relative I mentioned, contractors and other people who’ve bought their first home from 2009 onwards won’t like my answer here! However, here goes.
The low rates we’ve seen since the financial crisis did have to revert to normal at some point.
We’re close to that moment right now. Lenders may have a little wiggle room left, but it won’t be a lot. Even that flexibility could vanish with the expected base rate rises we expect this year.
Don’t forget -- mortgage rates have dropped by 2% since the fallout from the disastrous Mini-Budget. That’s an unprecedented drop over such a short space of time.
Also, factor in that lenders know January is a historically slow month. It’s a time when they buy business with low rates. Understand that and you understand two things:
- …why the rates on offer now are not that much higher than the base rate;
- …rates are unlikely to go much lower than they are today this year.
If you’re a first-time buyer, conditions for getting onto the property ladder won’t get much better than they are today -- if at all.
Quick answer to Q2? If it’s your ideal home, buy it
So, should wannabe home-buyers and even aspiring home-movers wait for more properties to come onto the market?
No. Or at least, no I don’t recommend you do wait. Okay, so there’s only half the number of properties coming onto the market in 2023 so far than there were at the back end of 2022. But look what’s preceded the market we see now.
More recently, during lockdown, there was a rush to the suburbs from city centres. The so-called ‘Race for space.’ There wasn’t enough supply to meet demand then.
Over a longer term, predominantly since the Right to Buy campaign of the early-80s, Britain has been woefully short of affordable housing. Consecutive governments (all political parties) have failed to deliver on their manifesto promises of comprehensively addressing housing shortages. With everything else going on right now, don’t expect the current government to turn that sad (sad) trend around.
My advice? If you see a home that truly ticks all your boxes, buy it.
Quick answer to Q3? The end of cheap money, part 2, is underway too!
We’re often asked, ‘Should I sit it out on my lender’s SVR?’
I’m going to answer this in two ways: what I would have said in October, and what I’d advise now.
In October, we had:
- high inflation,
- energy prices on a never-ending upwards spiral,
- war, and
- job market/contractor continuity uncertainty.
I’d have advised you then to either drop onto a tracker mortgage, or to have sat on your SVR and wait for the lenders’ knee-jerk reactions to the Mini-Budget fracas to pass.
In fact, that’s exactly what we did. Rather than commit our clients to a 2-year fixed at 6%, we turned down that business and asked them to show patience. As it turns out, that was the right decision.
And while some of those conditions we faced in September-October continue to prevail, addressing the same question today leads to a much different answer.
NatWest and Barclays tracker mortgages. Are they for you?
Yes, there’s still the tracker option. Barclays and NatWest are offering around +0.38% above the base rate. They’re a good option because there’s no early repayment charge. Conversely, with the expected further rise of the base rate, a tracker rate could well go up in the near future before (potentially) settling back down to around where we are now, give or take.
Where today’s answer differs greatly from October’s is that I’d also ask clients to consider taking out a 2-year or even a 5-year fixed deal now. Yes, you’re going to be paying a lot more than your current/currently-lapsed fixed rate.
But if you’re waiting for sub-3% mortgage deals to return, you’re going to be waiting a long (long) time.
Are you concerned about your mortgage as a contractor who’s an existing borrower?
Your mortgage is probably your greatest monthly expense, so managing your household budget may feel difficult if your mortgage payments have increased. Budgeting is essential if you’re struggling to afford your financial commitments, so prioritising your debts is essential.
If you're concerned about your repayments, you should contact your mortgage broker or lender as soon as possible. Lenders have been given strict guidelines by the FCA on how to offer support tailored to an individual’s circumstances.
Get help from your lender to pay your mortgage
If you’re struggling to pay your mortgage, your lender has options to help you (see a short glossary of terms, below).
Be aware, though. Making changes to your mortgage, even temporary changes, may result in higher monthly payments in future, and/or paying back more overall. They can also affect your credit file.
Depending on your circumstances and the terms of your mortgage, lenders have been known to temporarily reduce your rate, or give you longer to make payments. Here are some of the ways they can typically help you – and the typical terms they use, or you could ask about:
Glossary of lender terms and solutions if you’re struggling with your mortgage
Term extension: By extending your mortgage term, your monthly payments will reduce. However, it’s important to note that this will increase the amount you have to pay back overall.
Move to interest-only: Interest-only mortgages are typically available to homeowners with a plausible means of repaying the total amount at the end of the mortgage.
For instance, if your property value increases sufficiently, you can downsize to a smaller home and still pay off the mortgage.
Temporarily switching to interest-only: Of all the options available, switching to interest-only for a short period is the one that is offered by most lenders.
We believe such a temporary switch to paying interest-only is a good option if you need to reduce your monthly payments for a limited amount of time. But expect your mortgage payments to increase when you go back to capital repayments.
Today’s housing market takeaway for contractors facing a potentially tough 2023?
The good(ish) news for contractors is that, now that things are settling down a tad, the way lenders appraise the typical limited company director for a mortgage hasn’t changed. It’s very much a case of ‘as you were’.
Contractors regularly meet lenders’ target of mortgage repayments constituting ‘not more than 30% of income’ (as long as they go through a contractor-friendly lender). People on lower incomes, disproportionately affected by the cost of living crisis, may not have as much of a buffer.
So, there’s not so much an advantage for contractors right now, but definitely a move closer to a semblance of normality.
A New Year? Yes, but some things don’t change…
True to form, I’m going to finish as I always finish. But it’s more appropriate now than ever. Contractors, to maximise your chances in this still far from predictable and still potentially volatile market, do not make a move on the mortgage front without speaking to a specialist contractor mortgage broker first.
I’d love it if that were us – of course, because we’re extremely well-positioned in the mortgage market to assist contract professionals, but more important for you is to get guidance from any bonafide specialist who understands your unique situation. So that means saying ‘no’ to a ‘general’ mortgage advisory – tailoring products and services to niche professionals who have very specific circumstances isn’t what they do
There’s quite a bit to get your head around here, in this oversized 'nutshell' article to the mortgage market for contractors in 2023. If you have questions, give us a ring. Your call to us is 100% confidential and 100% no obligation. In the meantime, let me wish you the best of luck and a prosperous year to come. Here’s to your successful house-move in 2023 or your manoeuvring of the forces that shape it!
Find out more about contractor mortgages or get in touch with Freelancer Financials about your mortgage here.