The noise around the Bank of England base rate rise is drowning out the bigger problem of recent swap rate changes according to David Whittaker...
Against a summer backdrop of incredible but very real events across the globe, BREXIT might seem a somewhat parochial inconvenience were it not for the fact that the Tory government is weakened by in-fighting and the lack of a working majority in the Commons. In the long-term, the Conservatives can hardly rely on six DUP MPs and a dogmatically bureaucratic negotiating stance coming from Brussels doesn’t bode well for economic certainty as we approach the end of the year.
It is unsurprising therefore that the ratings’ agency, Moody’s, downrated British Government debt on 23rd September which lead to a massive spike in SWAP rates – five year swaps moved from 0.77% to 1.10% before settling back to 1.08%.
Add to the mix, Mark Carney, who is flagging a rise in Bank Rate to the market, and we could finally be on the verge of an upward movement in mortgage rates. Of course, the “Guvnor” has done this before and nothing happened. He is not alone; my own predictions’ track record in this area isn’t overly accurate either! But we have seen residential lenders withdraw their most aggressively priced fixed rate products. My trusty technical support manager tells me that BM Solutions and The Mortgage Works are also closing down their special products – all signs of lenders preparing for moves in Bank Rate.
To my mind, the bigger threat is to fixed rates – those crazy residential five year fixed rates at 1.65% are over and anything below 2% should be seen as having a limited shelf life. The buy to let space can absorb the impact for a little longer as margins are higher but I would be very surprised indeed to see five year fixed rates from credible lenders below 4% beyond the February Monetary Policy Committee meeting, if not sooner.
Whilst this may further subdue purchase activity, the opportunity for remortgage business, in both the residential and buy to let space, will be immense. Home-owners, including landlords, may well run for cover in the months ahead before fixed rates move too far away from relatively well priced historic variable rate loans.
Of course, we are still in the early period of PRA SS 13/16 Part 2 where Portfolio Landlords have been defined as those owning “four or more mortgaged properties” including the current transaction if a purchase – a definition that proved too complex for a handful of lenders as the 30th September deadline approached!
The issue for us as buy to let brokers is still service. Clearly, we are entering an acclimatisation period. Inevitably, turnaround times will be adversely impacted as we all adjust to a post-PRA 2 world, which means that we have a choice to make. Do we send cases to the specialist lenders, or do we stick with the mainstream providers who have a limited understanding of the new processes that they now face?
We are keeping a close eye on service levels and working hard to react appropriately to our clients’ needs. There is absolutely no point in choosing a lender that is struggling to turnaround cases if the client needs a quick deal. In these circumstances, shouting simply isn’t going to help.
Having said that, in my experience from attending investor shows recently, many portfolio landlords still don’t know about PRA 2 and won’t until the next time that they need finance. It’s not anyone’s fault, it’s just that some landlords do not have their heads above this particular parapet. Brokers could find that this ‘bedding in’ period goes on for quite some time.
Longer term I wouldn’t be surprised if some brokers chose to walk away from buy to let altogether. It certainly has become much more complicated over the last 12 months – and for no more recompense from most lenders. Those brokers who decide to remain could find that they get a larger slice of the broker pie despite overall BTL lending volumes falling back from £40Bn last year to UK Finance’s expected £35Bn by the end of this year.