Posted on: March 16, 2023

An Overview of The UK Mortgage Market in 2023

27-02-2023 Correct at time of publication, but subject to change.

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It is no secret that 2022 was a whirlwind for the UK mortgage market. Vladimir Putin’s invasion of Ukraine and the subsequent effect on oil and gas supply saw inflation rocketing to over 10%. The Bank of England’s preferred method to control inflation is to manipulate interest rates and this was evidenced by an increase in the Bank of England base rate from 0.5% in March 2022 to 4% currently.

This caused a significant amount of uncertainty. And it wasn’t helped by Liz Truss’s controversial budget, which shook financial markets and resulted in Bond rates increasing. These bond rates affect the price we pay for our mortgages. So essentially a double whammy! The consequences were inflationary pressures and a general increase in the cost of wholesale borrowing. In the autumn of last year the lowest rates were above 5%. However, following comments from the Bank of England that the “forceful” increases in interest rates were likely to stop, money markets have been more reassured and so rates have softened. We now see the very lowest rates dropping to around 4% as I write (1). But of course, these rates are not available to everyone.

Some UK mortgage market experts are commenting that the Bank of England base rate has peaked, or at least is close to peaking. Furthermore that the base rate may start to drop later in the year or early in 2024. (2)

Whilst this is possible, there are still risks out there. The International Monetary Fund (IMF) stated the UK would be the only one of the G7 members to have negative growth this year. Whilst recent data shows Gross Domestic Product (GDP) dips in and out of negative growth (3), it is my opinion that a recession is still a significant possibility. The cost of living is still weighing heavy with private sector pay lagging behind inflation and the situation with public sector pay is even worse. The threat of strikes and the effect it has on GDP is also an issue until it can be resolved. So there are headwinds, but we are a resilient nation!

Source: Unsplash

The current state of the UK mortgage market

It is fair to say these events have seen a significant reduction in activity and transactions in the property market. Borrowers seeing a reduction in their spendable income and an increase in mortgage costs are less inclined to move. Buyers are much more likely to sit on their hand waiting for the right property at the right price. And in some cases buyers have been priced out of the market. And of course Buy to Let investors have all but dried up because the higher interest rates are denting or wiping out their profit. This is on top of the other factors that are deterring landlords, such as higher taxes and increased regulation designed to protect tenants.

Another factor is that lenders are less keen to lend at high income multiples when the underlying rates are considerably higher than they were a year ago. So many lenders have tweaked their affordability calculators to lend less at any given level of income in order to protect borrowers from over committing themselves. And, until here is more clarity on interest rates, lenders will continue to be prudent and cautious.

But it is not all bad news. The reduction in mortgage volumes means that lenders are not hitting targets. This means more competition, and competition can drive interest rates lower. At present we are seeing small reductions in rates as lenders compete in a smaller market place. It will depend on money market swap rates whether this trend will continue.

For some borrowers it will be the first time they have experienced rates at this level.

The Bank of England base rate dropped below 1% in March 2009 and only breached this level again in May 2022. The post Covid-19 period contributed to a slight overheating of the market that was fuelled by pent up demand. Prior to 2009, rates bounced around 4 to 7%, but prices were lower and lenders less generous with income multiples. And of course borrowers who had mortgages in the early 1990’s will tell tales of rates at 15%, albeit it fleetingly.

Is it possible to forecast what’s to come?

I believe if retail mortgage rates drop to a band of 3.00% to 3.75% this will start to sow the seeds of recovery. Mortgages will be more affordable and confidence will start to return. The competition for mortgage business will drive lower rates. But the question here is, what are lenders paying for the money they are borrowing? Evidence from mortgage software supplier Twenty7Tec concludes that mortgage searches on their software were at 30,000 per week in January, which demonstrates there is still demand out there.

And of course a market that has an oversupply is a good thing for buyers. This means buyers have more choice and can drive a harder bargain. If you are moving home and finding buyers offering less than you want, try to negotiate with your onward purchase. You may be able to obtain a discount to offset your loss. If you are moving up market this more pragmatic approach can see you getting your dream house at a bigger discount than you have negotiated on your sale, so you may end up better off in terms of the differential required to move.

Source: Unsplash

In summary, I think 2023 is likely to be a tougher year for the UK mortgage market. Lender competition will drive rates down, but the headwind to this will be other economic factors. Confidence will return to a degree, but there won’t be a significant recovery this year. For those that want to move, don’t be put off, instead focus on driving a hard bargain.

David Wood is a director at Village Financial Services Ltd. Contact details can be found on our website. At Village Financial Services, we can provide mortgage advice to first time buyers, remortgages and buy to let landlords. Our mortgage experts are highly qualified and have been providing mortgage advice since 1989. If you want to discuss your specific situation, get in touch today for bespoke advice.

(1) Source Trigold mortgage sourcing as at 17.02.2023

(2) Source FT Adviser 03.02.2023

(3) Source ONS

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