Brexit, now Trump, how will this affect my ability to lend money?

The mortgage broker John Charcol has warned that long term mortgage rates for UK homeowners are likely to rise within the next few weeks following a surge in the cost of borrowing for lenders as a result of Donald Trump’s US presidential win. The firm are predicting that 5 and 10 year fixed rate deals will be the first to see rates go up, and thus reverse the 12 month trend of lenders slashing rates, to the lowest ever seen, in a bid to encourage borrowing.

Swap rates, which is the money market rates paid by lenders and directly influences mortgage rates, has risen significantly since August, with the biggest increase in the cost of 5 year money up from 0.43% to 0.9% at the start of November. Since Trumps victory, swap rates have spiked again, with 5year swaps now at 1%.
Simon Collins, of John Charcol, said: ‘Immediately after the Brexit vote in June we saw swap rates plummet, allowing lenders to cut mortgage rates left, right and centre.  But since late summer those money market rates have been steadily rising to reflect the growing uncertainty around the world. Trump’s victory has just added another massive uncertainty into the mix of political and economic unknowns, and it’s driving people to want to lock in to the longer term fixed rates on offer today.’

Indeed economist Roger Bootle from Capital Economics also warned that rates are on the rise, stating that ‘Trump’s victory has exacerbated the upward movement in Treasury yields; pushing 10-year UK gilt yields higher too. Meanwhile, market participants have revised up their expectations for official interest rates in the UK further over the past month or so. Indeed, while the latest published economist consensus forecast still points to a further cut in interest rates over the next couple of quarters, markets now appear to be pricing in a rate rise in the first quarter of 2019.’

Economists use Gilt yields as an indicator of future mortgage rates, as they influence the direction of swap rates and the lenders costs.

Mr Collins did acknowledge that whilst there are still some ‘pretty cracking deals’ available over 5 years, he expects that lenders will start to raise mortgage rates sooner rather than later. He also added; ‘The problem is that no-one knows what the future holds – locking in to a five-year fixed rate today gives at least a bit of certainty until we’re out the other side of Brexit.’

Moneyfacts finance expert Rachel Springall admits that all this uncertainty does put a lot of pressure on mortgage rates in the short term,  but this can be offset by lenders needing to meet lending target by the end of the year. ‘Lenders have a big appetite for new business right now, shown when they compete against one another to offer the lowest rates to grab the attention of new borrowers. Mortgage providers could well be considering their lending targets and how to hit them before the end of the year, so we could still see some enticing deals surface over the coming weeks.’

Director of Coreco mortgage brokers, Andrew Montale agreed with Rachel Springall stating that the consistent rise in swap rates was enough of a valid reason for lenders to start increasing their prices. However he also stated that: ‘Much depends on competitive pressures and this time of year lenders are keen to get as much business through the doors as possible to both finish the year with a bang and start the new one running.’

Mr Montlake did warn against waiting to see if lenders slice rates further, adding ‘It seems pointless for borrowers who need to remortgage now. To delay any further and take the risk that they will miss out on the current crop of competitive products makes little sense – especially when you can now obtain five-year fixes from just 1.84 per cent through HSBC and 10-year fixes from 2.49 per cent through Barclays at 60 per cent loan to value. Even those with only 15 per cent equity or deposit can get five-year fixes at 2.29 per cent through Hinckley & Rugby Building Society or a 10-year fix at 3.63 per cent through TSB.’

Recent research by Moneyfacts and the AmTrust show how post Brexit rate cuts have favoured those with large deposits or a significant amount of equity in their homes.  First time buyers or those with small deposits have not been getting the best rates.  Indeed average mortgage rates have fallen three times faster for those with bigger deposits compared to those with small deposits since the UK’s vote to leave the EU.

Following the Bank of England’s decision to lower the base rate to 0.25% in August, mortgage rates fell quite rapidly for everyone.  However those with a small deposit, mortgage rates fell very slowly. Loans with a 5% deposit have fallen by an average of 0.05 percentage point in the last quarter; a third of the average 0.15 percentage point drop in rates for those loans at a 75% loan to value, or at least a 25% deposit.

Chief Underwriting Officer Simon Crone,  of AmTrust International stated ‘The early signs are that borrowers with small deposits may not be benefiting as much because of less competition as lenders reassess their risk appetite and rely upon those with larger deposits instead.’