Why we may see mortgage rates stabilise, or even fall, in the New Year
2022 will go down as one of the most eventful years in the mortgage market's recent history, arguably its most momentous since the financial crisis.
While the year started off in a fairly benign fashion, the market was left trying to find its feet following sudden inflationary pressures, which were all compounded by the ill-judged mini Budget in September.
In a year, we have gone from record-low base rate, a red-hot housing market and ultra-cheap mortgages, to stuttering house price growth and the end of the cheap borrowing era.
The reason mortgages are significantly more expensive, of course, is down to the aforementioned rampant inflation and the mini Budget, which sent gilts and swaps soaring.
As any broker will know, the result of this is that both homeowners and landlords are now looking at rates beginning with a five or a six. A year ago, they would have been able to pick up a deal in the two to three per cent range.
However, thankfully, there are signs that the market is beginning to stabilise and volatility dampen.
A sense of calm
Since coming into power, Rishi Sunak and Jeremy Hunt have gone on a charm offensive to woo markets and convince them that UK fiscal policy can be responsible once again.
While some of the reputational damage caused by September's mini Budget may take years to repair, their efforts seem to be having an effect.
A month or two ago markets were predicting a base rate of six per cent or more next year, they now believe the benchmark rate will peak at around 4.75 per cent.
That improved outlook aligns with swap rates, with swap rates rolling back a little over the past month.
Following the mini Budget, lenders scrambled to protect their bottom-line, increasing their mortgage rates rapidly to avoid leading at a loss.
Due to the unprecedented speed with which swaps rose, it's probably fair to say that some lenders played it safe and increased their rates more than necessary.
Now the market has become more stable, lenders - West One included - have been afforded some leeway to reduce their rates quite significantly.
But what happens from here?
That's a difficult question to answer but, as I said above, things look to be heading in the right direction again.
What is next for rates?
While base rate and swaps aren't joint at the hip, the latter is influenced by expectations of the former most of the time.
Base rate is now expected to max out some 1.5 percentage points lower than previously predicted, swaps have fallen by more than 125bps since the mini Budget.
On top of that, we have started to see more specialist lenders launching products under six per cent, which is easing some of the interest coverage ratios that are challenging the buy-to-let market.
All things being equal, the worst is hopefully behind us are we now see more orderly interest rate markets, which should allow lenders to make further cuts to their fixed-rate ranges.
Of course, there is a big caveat, as always: there is no guarantee things will remain the same. A deterioration in the economic outlook, heightened geopolitical tensions or another energy crisis could throw a spanner in the works. And as we saw in the Autumn, when things change, they tend to change fast.
Nevertheless, as things stand, the outlook is looking much rosier than it did even a month ago. That’s something to be welcomed as we head into the New Year.