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It Will Pay to Wait to Refinance Your UK Mortgage

Hold on before committing to a much higher interest rate on your mortgage refinancing and you’re very likely to get a better deal, is the sage advice from UK household finance advisors. 

While UK house prices may be turning lower, with the Nationwide Building Society survey showing a decline of 1.4% in November, this follows impressive gains since the worst of the pandemic of more than 20%. According to Nationwide’s Chief Economist Robert Gardner, home prices are likely to rise by around 3% this year, though he expects the headline rate will turn negative by the middle of next year due to comparisons with big gains in early 2022. But a modest adjustment after a period of strong gains is probably necessary and healthy.  

My optimistic view, and why it makes sense to delay refinancing, is that house prices will settle a bit lower, but not substantially so. That is predicated on the Bank of England interest rate, currently at 3%, not rising above 4%. While official rates will rise further, there are signs of caution starting to emanate from Monetary Policy Committee members. BOE Chief Economist Huw Pill said at a web event last week that he expects inflation to be falling rapidly in the second half of 2023; it is unlikely that the MPC will be advocating yet higher rates in that environment.

The current trend in mortgage rates very much echoes the early days of the pandemic. In 2020, the supply of mortgages fell sharply because all the most attractive deals were withdrawn en masse. As the economic situation stabilized, lenders returned to the market with increasingly competitive products. That pattern is being repeated. In the aftermath of September’s ill-fated mini-budget, 1,500 of the best deals were withdrawn, contributing to a sharp rise in average rates as lenders sought to discourage new business. But just as in 2020, realistically-priced offers are steadily coming back, as uncertainty eases and lenders regain their appetite.

The sharp increase in mortgage rates following the mini-budget  was more apparent than actual. According to Peter Tsouroulla, head of mortgages at Trinity Lifetime Partners, very few deals were completed at the scarily high 6 to 7% rates widely mentioned in the media. The average rates of mortgages completed in October was actually 3.1%.

Although the economic backdrop is deteriorating, the UK mortgage market is fundamentally in decent shape. Banks weathered the pandemic well and are still keen to lend on secure assets at now considerably higher rates. The most competitive five-year fixed rate available currently, from Principality Building Society, is at 4.6%. That is a sizable drop from when I last compared the best deals on Oct. 20, which was from Nationwide at 5.39%, despite the BOE having hiked its base rate by three-quarters of a percentage point  in the interim.  It helps that the employment market is the strongest in 40 years and overall wages are growing at a brisk 6%.

UK financial markets have calmed down significantly since Chancellor of the Exchequer Jeremy Hunt’s Autumn Statement on Nov. 17. That’s a vital requirement for lenders whose mortgage offers last for as long as six months to bridge the often lengthy house purchase completion process. Gilt yields, and the two- and five year interest-rate swap rates that many lenders reference their mortgage pricing to, are back down to levels last seen in early September before the pension leverage crisis exploded. With 10-year swap rates now lower than those for five years, lenders are slowly offering more competitive fixed-rate deals out to a decade, especially for more established borrowers.

Almost all new mortgages in recent years have been with initial fixed-rate terms, so much so that such deals now comprise 85% of all housing finance, according to Nationwide. Some 1.8 million will need rolling over in 2023, about a quarter of the total outstanding, and the vast majority will need re-signing at much higher borrowing costs. Refinancing can be arranged three months in advance, and often up to six months if changing lenders, but this doesn’t commit the borrower, just the lender. Better deals could easily arise before existing arrangements expire, so patience may be rewarded.

Double-digit UK inflation, exacerbated by the energy crisis, is gnawing into affordability, but this may not last for too much longer. It helps that household saving were built up considerably during the pandemic. There is nothing that says house prices can’t rise in a recession, especially on a small, crowded island with ridiculous planning rules, and a government incapable of improving them. Owning real estate in an inflationary environment normally works in your favor.

Mortgage applications have fallen sharply, and will probably fall further as the housing market goes into winter slumber mode even earlier this year. Nonetheless, actual approvals are holding up relatively well. Mortgage brokers report business is returning with a reversion to the firmer underlying trend before the mini-budget saga. So while momentum has been curtailed by the unexpected market volatility, there are grounds to suggest it will return in the spring. It is promising that smaller lenders have pushed to the front with the best available deals in the past month. The bigger banks, which have dominated over the last two years, are currently taking more of a backseat. The refinancing market alone will occupy already overstretched processing capacity. 

There has been a pickup in demand recently for tracker mortgages, set at floating rates linked to the BOE’s base rate plus a spread dependent on the borrower’s creditworthiness, as initial monthly payments are lower than for fixed-rate agreements. These will ratchet higher along with official rates, but there is also the prospect that they might come back down again in coming years. And by the summer, when the bulk of refinancings come due, there should be much more choice across all the different sizes, terms and types of mortgages.

Since the April 2014 mortgage market review, the nature of UK home borrowing has shifted considerably, with far more stringent requirements. This has led to a considerable reduction in arrears and repossessions. Borrowers are subject to stress tests, with affordability assessed at much higher potential interest rates. There is a greater focus on the loan-to-income ratio, rather than simply as a percentage of the property’s value. It’s a lot trickier to become seriously leveraged than it was before the global financial crisis, which has improved the quality of lenders’ overall exposure. 

It’s too early to get overly bearish on the housing market, which has an uncanny and persistent ability to shrug off bad news. The fundamental reasons why UK property is expensive relative to average earnings have not gone away. For homeowners with expiring fixed-rate mortgages, it will pay to wait as long as possible for more competitive deals to come to market as interest rates steady and lenders’ put their substantial cash balances to work in what is still a safe and lucrative market. 

More From Bloomberg Opinion:

• The UK Is Playing Politics With the Rental Market: Stuart Trow

• UK Housing Market Gets Desperate Once More: Merryn Somerset Webb

• Hunt’s Fiscal Medicine Won’t Dispel UK’s Pain: Marcus Ashworth

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Previously, he was chief markets strategist for Haitong Securities in London.

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