What a changing mortgage market means for home buyers

Peter Joseph By Peter Joseph

Published 22nd November 2022

What a changing mortgage market means for home buyers

Whether you’re a first-time buyer or if you already have a mortgage, right now there is a lot of uncertainty in the UK mortgage market.  We take a look at what's going on and the effect on home buyers.  

Rising interest rates in a swap market

With an economy that is currently trying to rein-in inflation against a backdrop of war in the Ukraine, mortgage rates have become a cause of concern for many with first-time buyers in particular coming into sharper focus as they attempt to join the property ladder.

Interest rates on mortgages have increased dramatically over the last few months. In January for example, the average buy-to-let two-year mortgage product was at 1.69%. By August, it had doubled to 3.43%, and currently, the best rate available is just over 5%. The main factor behind the increase is higher fixed-rate mortgages which are noticeably  in comparison to lower rates on variable-rate products.

Why are fixed rates increasing?

When it comes to mortgages, mortgage lenders borrow funds in a swap market (when two parties swap interest rate payments for another) to lend to prospective homeowners. Lenders will assess their cost of borrowing versus the potential return on mortgage repayments and effectively pass the volatility risk to mortgage borrowers. The interest on borrowed funds fluctuates over time so the rate the lender pays in the swap market drives fixed-rate mortgages.

If rates rise, then mortgage lenders will increase their pricing to maintain their profit margin and if interest rates rise quickly, as has happened here, then lenders may pause or withdraw products until pricing stabilises.

How has this affected mortgage products?

In the last few months, the swap rate has ballooned to over 5%, meaning lenders can only afford to lend at rates above 5%, often in the 6% mark. Variable rates have not been as volatile because lenders can adjust the interest rate on your mortgage depending on prevailing rates set by the BoE rates.

This, together with the unease over the recent September mini-budget, has led to lenders pulling mortgage products from the market. Over 1,500 mortgages were withdrawn in late September, leading to a 30% overall reduction in mortgage products. Most lenders are pulling these products, repricing them, and then listing them on the market again, which has significantly impacted the number of choices available to borrowers. 

What are the best mortgage rates now?

Although there has been a decrease in the number of mortgage deals available to borrowers, deal numbers have begun to gain traction since the beginning of November. The most competitive mortgage rates currently are available for people borrowing at 60% loan to value. Lenders like the Nottingham Building Society and Platform offer these on two-year fixed terms at around 5.09 – 5.45%. 

For five-year fixed terms, borrowers can get as low as 4.84% from Platform, while Virgin Money and Coventry Building Society are currently at 5.09% and 5.14%. 95% mortgages allow borrowers to stretch to a 10% deposit for lower rates with a 5% deposit on the property’s value. Interest rates on 90% mortgages range between 5/37 – 5.89%. 

Mortgage products change daily. For the best mortgage rates today click here.

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What does all this mean for home buyers?

What type of mortgage?

New mortgage products are being launched and fixed rates are dropping although borrowers looking to join the property market are walking in when the markets are nervous. The expectation of a 5% BoE base rate is still mostly tied to speculation, and it’s worth exploring different products. Variable-rate mortgages may offer more value right now as can discounted mortgage rates whereby buyers take discount for 2 years and then look to remortgage or move when the market has settled. Higher deposits also give access to preferential rates.  It also pays to keep an eye on fixed rates. According to Moneyfacts who are providers of financial data, the average rate on a five-year mortgage  has dropped below 6% for the first time in 7 weeks. 

How easy is it to get a mortgage?

Lending requirements have also eased following the Bank of England scrapping the affordability test in August which could make it easier to get a mortgage. However, some experts believe that lax lending requirements may expose lending institutions to higher default risks from loans advanced to high-risk borrowers.  
In terms of property supply, opportunities can start to surface. A recent National Residential Landlords’ Association (NRLA) survey found that 23% of landlords plan to dispose of some of their buy-to-let properties in the next 12 months. This represents a 20% increase from the same period last year. This may increase the number of properties on the market which could be a good opportunity for first time buyers. 

Is it the right time to move?

If you are looking to move home, the advice is to be cautious and do your research. Understand your own personal circumstances, look at what is most cost effective to you, and speak to property professionals such as a mortgage advisor and local estate agents. It is now more important than ever to be diligent with what you can afford, work on the assumption that higher interest rates are here to stay and keep looking for opportunity.    
 

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