What to Do If Your Mortgage Rate Jumps

Anthony Emmerson · Trinity Financial

Rent versus buy is roughly even for young buyers on 40-year terms, as rents keep rising.

For young buyers who take a 40-year mortgage, monthly repayments are still decent and are comparable to what they would pay in rent, perhaps a little more. Unlike rent, the mortgage payment includes capital repayment that builds ownership. The gap has narrowed since May because rents have kept rising steadily, which he links to the Renters Reform Act reducing the number of rental properties on the market, an unintended consequence of that policy.

“If you are, however, young and you can stretch it out over a forty year term, those monthly payments are decent... we're still having conversations even today where those monthly premiums, if you're young and you can take a forty year term, are actually comparable to what they were paying in rent.”at 8:48

Anthony Emmerson · Trinity Financial

Flat prices are near the bottom as flats are oversupplied and landlords are selling.

Flat prices have fallen significantly from their peak and are very competitively priced. Developers are building flats rather than houses because they fit more units on a plot, and there are more flats for sale than buyers. Nearly half of landlords surveyed by the National Landlords Association intend to sell within a year or at mortgage renewal, when rates jump from roughly 1-3% to 5-6%, and tax changes add pressure. Buyers have been waiting for prices to fall further, but he thinks prices cannot fall much more without triggering a wider problem, such as negative equity for owners who bought in the last five years, so flats are becoming worth buying.

“we are seeing that we have more flats on the market than we have buyers for them at the moment... I don't think that they can fall much further without sort of triggering a bit more of a wider problem.”at 13:21

Anthony Emmerson · Trinity Financial

The new Help to Buy scheme, limited to new builds, mainly helps developers and will do less than the original.

Restricting the proposed scheme to new builds looks designed to get builders to use their land banks to meet the government's target of over a million homes. That is good for developers but probably not for the general public, since flooding one part of the market has unintended consequences for the rest. Builders only build when the price covers their costs, and construction, materials and labour are much more expensive than before, so margins are hard. He thinks the scheme will help but less than the original Help to Buy. A 2.5% deposit is a small cushion, so buyers could fall into negative equity easily, and the product should cover second-hand homes as well to move the whole market.

“The fact that these are looking like they're going to be restricted to new builds only, that policy looks to me like it's being used to get the builders to use the land banks that they've got.”at 31:28

Anthony Emmerson · Trinity Financial

UK fixed mortgage rates are moving with swap and gilt rates, not the unchanged Bank of England base rate.

UK lenders are repricing fixed mortgages up to twice a week because Sonia swap rates are moving sharply. The Bank of England base rate has stayed at 3.75% all year, but an oil shock tied to the Iran war pushed swap rates and gilts up quickly, and fixed mortgage rates derive from those. Many people wrongly think the base rate controls mortgage pricing, and the speed of the move caught the market off guard. The average 2-year fix quoted by MoneyFacts has risen from about 3.6% to nearer mid-5%, though many borrowers still get better rates than that average.

“We have lenders repricing sometimes once or even possibly twice a week because the Sonia swap rates are changing quite dramatically... a lot of people think that the Bank of England base rate is what controls interest rates, and the Bank of England base rate hasn't moved.”at 4:19

Anthony Emmerson · Trinity Financial

Tracker mortgages now price in several Bank of England hikes, with wider margins and possible gradual rises.

Tracker mortgage margins have widened, to about 0.78% and over 0.9% in his recent conversations. A tracker now effectively carries about three base rate rises before it matches the 2-year fixed rate. Because swap rates have moved far more than the base rate and are not directly linked to it, a tracker could start at a much lower rate than the fixed deal and then rise gradually as the Bank of England raises rates. The risk is that rates keep rising beyond three hikes, which would leave borrowers facing whatever the market offers if they switch to a fix. Whether a tracker suits depends on attitude to risk and on whether the borrower can absorb the worst-case payment, which is easier at around three times income than at five and a half times.

“So effectively, a tracker rate now has three Bank of England base rate rises, you know, available within it until you get to the point where you are starting to match the available two year fixed rate... given that swap rates have moved so significantly, and as you see, they're not linked directly to the Bank of England base rates”at 28:28

Anthony Emmerson · Trinity Financial

Prime London property has fallen because wealthy buyers distrust UK government tax direction.

The top end of the UK property market has been hit by a lack of confidence in the direction of UK government policy. Wealthy buyers are very mindful of taxation and of how they are treated in the economy. So fewer of them are investing in that asset, especially when other parts of the world look more attractive. This fits the wider wealth exodus story and explains the prime London price declines since 2014.

“Personally, I think that the very top end of the market has been hit by a lack of confidence in the direction of travel of the UK government.”at 18:42