A new era in mortgage lending?

We have entered a new era in mortgage lending. The era of rock bottom rates is over. The question on everyone's lips now is where will the market settle are what is likely to be the new normal for mortgage rates.

 

For most commentators' rates are still too high, especially as inflationary pressures ease. So, that begs the question when will see a cut to the Bank of England base rate to help stimulate the stalling UK economy? Well, we've got an interesting summer ahead of us.

There are many external factors that will impact that decision. A new government is set to be elected in the UK and will most likely signal their intent with a mini-budget soon after the polls close. In the wider world, we have an election in France that is already creating an amount of political and economic turmoil and a presidential race in the US which will certainly feed into Swap rates, one of the main funding mechanisms used by many lenders in the mortgage market to ensure they have money to lend to homeowners. 

All those factors, and Swap rates in particular, are likely to have a huge bearing on the rates UK mortgage borrowers will pay on their mortgages.

Looking at this picture, and contrary to the prevailing wisdom from earlier in the year, I don't think we are going to see a Bank of England base rate reduction this summer. Not least because a cut this close to an election is too politically sensitive for an independent and supposedly politically neutral Bank of England. In my view, we are almost certainly looking at Autumn for any cut and it will likely follow a mini-budget from whoever the new government will be. 

If the short-term picture is complicated then perhaps it pays to look back. On occasions like this, it can be helpful to look to history to see what we can learn about what our new normal may be.

Thinking back to when I came into the industry in the mid-1990s I was advising on mortgages with a five-year fixed rate of 13.65%. That is a figure that may make younger borrower's eyes water but back then that was considered a good deal!

I mention that as context and to make the point that it's interesting so many feel that having a base rate of close to zero unsered in some kind of golden era. Perhaps it was if we consider only mortgage borrowers. However, it's debatable how good those long-term low rates have been for the wider UK economy and it is certainly bad news for savers.

We also forget the driving factors behind why the Bank base rate ended up at 0.5%. It was a response to the small matter of a global financial crisis in 2008 which saw lenders like Northern Rock go to the wall and many other lenders wobble under the pressure. 

Taking all of that into account I think the new normal mortgage borrowers should expect for interest rates in two years' time is likely to be between 3.5% - 4%. That should help ensure that inflation is kept in check, that the UK economy can grow and that lenders and borrowers can maintain sensible lending practices which is crucial for a healthy and stable mortgage market. 

As the cost of borrowing increases then eligibility criteria may also become more of an issue. It's more important than ever that borrowers shop around the market and find lenders that can intelligently assess a borrower's position.

At West One we pride ourselves at taking a more human approach to the eligibility process and I think, now more than ever, that will prove valuable to our customers as they readjust to the new normal in mortgage pricing.

A new era in mortgage lending

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