Private Finance's Mortgage Memo - 9th August 2021
This is our take on what is currently happening in the mortgage market. Our views are often cited in several national publications, including; BBC News, The Times, Telegraph, City AM, FT Adviser and Daily Mail, as well as a number of key trade publications, so this should keep you ahead of the curve. If you have any questions on any of these stories, or would like further information, please do not hesitate to get in touch.
- More significant rate cuts as the 2-year fixed hits 0.83%
- Costly mistakes: adverse credit in a record low interest rate environment
- Holiday let lenders increase flexibility in booming market
More significant rate cuts as the 2-year fixed hits 0.83%
With every week that passes at the minute we are seeing consistent falls in the best rates on offer. However, the cut this week has been particularly significant, with the best available rate by 0.07% (or nearly 8%) to 0.83% for a 2-year fixed rate product – an astonishingly low rate.
- The interesting thing about this offer, is not just how low the rate is, but the fact it is only available on purchases and is significantly outperforming the lenders own remortgage offering. This is arguably illustrative of the fact they are trying to drive purchase customers to them in what is a highly competitive market, with high demand and low housing supply and thus lesser transactions to boost market share. Moreover, it shows both the lenders confidence in the housing market and in prices remaining high, as well as the low cost of institutional borrowing and the fact they have money that they need to lend.
Costly mistakes: adverse credit in a record low interest rate environment
Interest rates are currently at record lows with the 2, 3 and 5-year fixed all at sub-1%, however, those rates are only available to those with unblemished credit. A classic story we've heard many times is of a client in their 20’s spending far too much on credit cards as soon as allowed and then defaulting on them. We wanted to show how much this could cost a client in the long run if they then require mortgage a couple of years later if they were then in a position to buy with a 10% deposit.
- Based on average house prices of £268,000 in England (https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/april2021) and a usual first time buyer deposit being around 10%, we did some maths… At 90% the best 2-year fixed rate is currently 2.19%, however 90% stress rates on credit criteria are tight so would only accept those with near perfect credit. If a client has a few defaults 2-3 years ago or so they would likely be forced to go with a specialist lender like Aldermore for their mortgage. A 90% Aldermore mortgage would be 4.78% so doing the maths on the average property value in England it would cost the individual around £12,500 more in interest costs over the first 2-year period they have this mortgage compared to someone able to go with a market leading interest rate.
- Adverse credit in common across all wage brackets and a default can come from defaulting on a credit card to a unpaid telephone bill. Lenders are becoming more flexible on the latter; however, it is at their discretion and the spectre of a default haunts your credit report for 6 years after it was awarded.
- We believe financial education should form a part of the standard school curriculum to prepare teenagers for adult life. A number of clients are simply unaware of the potential effects of defaults and in a number of cases are surprised they even have them, until they need a mortgage…
Holiday let lenders increase flexibility in a booming market
Leeds building society have recently updated their holiday let criteria; they now look at holiday let properties based on a more commercial view of their holiday let projected income rather than their previous tenancy agreement system of stress testing rental. This significantly increases the maximum loan that holiday let owners / buyers can access through Leeds BS meaning they can get to higher loan to values often with Leeds holiday let interest rates which have historically been rather competitive.
- There two classifications of BTL lenders that lend on holiday lets, a large number do base the rental calculation on a holiday let income basis, but it is interesting to see a lender like Leeds Building Society make the shift too.
- Holiday let mortgages come at greater interest rates as it is viewed more like a commercial mortgage by lenders and a little more high risk due to the sometimes inconsistency of the rental income and higher upkeep costs etc., however the increased flexibility in this space is indicative of the huge growth and demand that we have since Covid forced holidaymakers to consider domestic options and confidence from lenders that this is a change that will have long-term implications.