MORE than 1.4 million people in the UK, including tens of thousands in Northern Ireland, will have had the joy of coming out of the security of a fixed rate mortgage into a tornado of hiked variable rates, often wondering if the weather was going to get worse. It is very stressful indeed. I get it.
So here is some more guidance.
We covered this at the beginning of the rate rises, and alerted borrowers not to panic into fixing with longer, higher rates. Hopefully you didn’t. They are still falling despite the ‘news’.
The role of a central bank is to keep an economy in check. One of their biggest risks is wage inflation. That can cripple economies, as businesses who are struggling with inflation themselves are being asked for wage rises as their staff struggle with hiked costs. Pay awards were running at over three times the central bank’s target, almost unheard of.
And this is how they deal with that.
Headlines from the Bank of England (BOE) will be gloomy – for example - ‘Britons warned to expect high rates for longer as Bank presents gloomy UK outlook’. Last year we were told to expect the worst recession. Try Googling ‘expect the worst recession’.
Fill your boots listening to the doom-mongers, but before you judge the journalist, it’s the message that was being sent out from the Bank of England trying to slow the economy – and a well-known market maker trying to make money out of it.
It’s a game with the Bank of England and market makers, but this can mean you make a big call on your family home based on communication aimed at the market makers of rates that you just wouldn’t be expected to grasp. ‘Prepare for a long an ugly recession’ was one headline.
And so, a cat and mouse games ensue, with market makers keen to do business on the mortgage market trying to second call the Bank of England.
This is how it works - think of the Overnight Index Swap (OIS) as the fixed rate of interest at which banks lend to each other overnight (Overnight Interest Swap). Think of the OIS rate as roughly the wholesale cost of money for the lenders to package their fixed rate deals.
They look at that rate, and then put together a package including their costs, profit and calculation of risk for the mortgage. A higher loan to value of say a 95 per cent mortgage will cost more than a 50 per cent loan to value.
And so, the market makers are always trying to outsmart the Bank of England who are trying to slow down the economy, versus their goal of doing business. So, on the one hand, the Bank of England will say ‘you’re all knackered’, and on the other, the market maker can see through certain realities like ‘rates at this level will shut the country down and we can see inflation is weakening, so you’re wrong and we think rates will drop’.
Examples of this last year where mortgage market rate expectations were being revamped each month as new data arrived. While never ending gloom from the Bank of England, rate expectations went like this: July 2023 – peak expected in March of 6.5 per cent. Next month that was down 0.75 per cent and the next month it was down to 5.42 per cent. During this time the Bank of England hadn’t reduced any rates.
The Bank of England don’t meet each month now. The next is December 14 and then February 1, but all along the market rates will have been fluctuating. So, speak to your independent mortgage broker rather than watching headlines and Bank of England meetings.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. For a free initial rate review and copy of our mortgage interest rate guidance report, email mortgage director Pat Greene on pgreene@wwfp.net or call 028 6863 2692.
