Guest Blog: The Trials & Tribulations of Residential Market Lending

Firstly, may I thank Warr & Co for inviting me to provide my thoughts on the current ongoings of the residential mortgage market. I would also like to thank you, the reader, for taking the time to read this blog.

When looking at the market conditions at the moment, taking only a current snippet of what is going on would be a lazy approach. It would only provide a doom and gloom outlook, much like our mainstream media, which is a great annoyance of mine. To gauge the overall market, I think we should investigate the reasons for the circumstances in which lenders and borrowers find themselves today.

The Past:

Since the major depression of 2008/9, the base rate has been artificially low. This led to a new mindset among borrowers, thinking that this was the norm for rates. It also felt like the Bank of England and the government believed this was the way to proceed. In my opinion, the rates should have been increased slowly over a prolonged period of time to avoid shocking the market. However, fast forward to September 2022, with a slight rise in interest rates and high inflation, the Laurel and Hardy of the political world came into power, AKA Truss and Kwarteng. They introduced large tax cuts for high earners and businesses.

Why was this disastrous? Firstly, it would cause government debt to rise, with some opinions in the market suggesting that it could double! The follow-on effect of this would be an increase in inflation, which scared the markets and caused SWAP rates to soar, resulting in a huge increase in mortgage rates.

It was evident to me and my team that this was going to be temporary, so as a company, we decided that if your mortgage wasn’t urgent, don’t do it! The rates stabilized in January and reduced slightly. This was mainly due to Rishi Sunak reversing the policies brought in by Truss and Kwarteng. The market received good news with the Bank of England predicting that the base rate would be around 2% in approximately 12 months. How wrong were they!

The Current Market:

On the 10th of July 2023, we saw the highest residential mortgage rates that the UK had seen since 2008. How did this come about? Well, the market is predicting a higher-than-expected inflation announcement on the 19th of July, and they are also predicting another base rate increase on the 3rd of August.

The mortgage products will not rise any further as the mortgage rates have already been increased in anticipation of this. The mortgage market does seem somewhat resilient at this moment in time as buyers are still looking to purchase. However, the number of people viewing properties has declined, and this, combined with the traditional slowdown in the market as Brits head off for their summer holidays, means that we may well see some more disturbing articles in the press very soon. Also, I predict that the banks will come under some pressure, as it could be deemed that they are profiteering from the current situation. The general public sometimes misconceive that the banks are here to help us. However, my somewhat cynical view is that they are here for their shareholders, not the general public’s welfare. If they were, we wouldn’t be one of the most heavily regulated countries in the world when it comes to financial legislation.

The Future Market:

Well, this is tough to predict, but I will do my best. If we follow the general market predictions, we are going to have a base rate rise in August and possibly another one in September. I do agree that this is going to happen. The base rate may even go up by a further 0.5% to 5.5% and may even increase to 6% in the not-so-distant future.

The prediction is that we won’t see the rates returning to 3.5% until February 2025, but this may all change if inflation reduces. However, indications at the moment suggest that this is not going to happen. The Bank of England is, therefore, going to use the shock tactic that the States used to reduce inflation, and that can only mean higher base rate rises. This approach has worked for the US, as the inflation rate has decreased to 4%.

My own prediction is that we will see mortgage product rates reduce towards the end of Q4 2023, and during the interim period, we will see small falls in the market value of property. But, as the powers that be seem to get it wrong at every turn, it may be possible that my short-term prediction will be at fault. The banking position is a lot stronger than it was during the worldwide depression of 2008/9, so I don’t foresee a global recession.

I suppose the question that I should be answering for those who are looking to buy their new home is: Is it a good time to buy? Well, my answer to that is this will be your home and not an investment. The cycle of the market is continuous, and there will be recessions and booms. But if you are deemed able to afford a mortgage in today’s market, then I would suspect that you are nearly at the peak of costs for a mortgage. Therefore, you will only be in a more affordable situation once the market returns to normal. However, as I will feature in my next blog, all mortgages that are taken out should include protection to cover illness, income protection, etc.!

If you would like to discuss the market in person or explore the mortgage products available, please do not hesitate to contact Charles Louis using the link below.

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Author: David Cookson, Managing Director of Charles Louis Mortgages 

Charles Louis Mortgages is a family-run mortgage advisory business that has provided exceptional service since its establishment in 1996. David has been at the helm of the company since 2002, steering it towards continued success with client satisfaction at the very core of the business and his personal ethos.