Will they won’t they… the Bank’s base rate decision
Richard Adams is managing director of Stonebridge Group
The next decision by the Monetary Policy Committee (MPC) in May appeared to be a ‘rate rise done deal’ after the last meeting, however it just shows how market sentiment, and the publication of conflicting data, can spread doubt when it comes to predicting ‘near certainties’.
A bigger fall in inflation than anticipated, some particularly weak retail data, softer business surveys, plus the rather cautious words of the Governor, Mark Carney, have all led to markets seriously hedging their bets when it comes to a May rate increase. Currently the markets appear to 50/50 on whether that rise is coming and remember this was 75/25 just a few days ago.
There’s no doubting that the ‘hawks’ on the Committee will continue to vote for a rise however it’s a question of whether the other members feel strongly enough to act now, rather than perhaps hanging on a month or two to see how the data (and the UK economy) continues to react.
From a mortgage perspective, again the mood music of an impending rate rise should be working firmly in advisers’ favour, especially when it comes to convincing existing borrowers that now is the time to remortgage, especially if they’re currently sitting on SVRs and are able to meet and jump over the affordability obstacles placed before them.
Recent data from Moneyfacts suggested that average mortgage rates are on the rise – up 0.25% in the last month alone, perhaps in anticipation of that MPC decision. It’s interesting to note that lenders tend to jump before they are pushed when it comes to rates, and that heavily trailed increases in BBR often act as the catalyst for lenders to make rises to rates rather than act once the MPC have made their minds up.
From a PR perspective this tends to mean that these lenders don’t get lumped in with those who react post-rate rise even though they’ve still increased rates just a few weeks earlier.
Moneyfacts say the average two-year fixed-rate mortgage is now priced at 2.5% – that’s across all LTVs presumably because clearly there are better deals to be had at lower LTVs – which is the highest level for almost two years and perhaps provides a compelling story for advisers to use to convince existing borrowers to act now before they rise even further.
One wonders too if lenders won’t be too displeased at this opportunity to increase rates, especially in the mainstream residential space where competition is incredibly heated, and I suspect margins have been very tight for some time. At certain points over the last couple of years we have seen two-year rates sub-2%, even sub-1% from some, and for those who can maintain their cost of funds there will be a benefit to inching up rates and improving that margin.
Advisers will recognise this is a crucial time for those clients who wish to ‘get in’ before rates rise further, and after a decade in which rates have been historically low, the increase in mortgage costs will be a new experience for many who might have got into the mindset that 0.25/0.5% BBR was ‘normal’. Indeed, this marks again a further step along the road to a ‘new normal’ which, depending on who you believe, could be back to the 2-3% mark over the course of the next 18-24 months.
We should also not forget that lenders will be working overtime in order to retain existing customers on product transfer rates, and advisers have a challenge to accept in terms of convincing those clients to use their services rather than opt for the tick-box product switch that lenders are going to be offering them. The message has to be, ‘Check with me’, before you go ahead because not only can you access those deals if they are the most suitable but you also can scour the rest of the market for better products.
Our obsession with BBR is not going away anytime soon and the headlines will be dominated by the decision over the coming couple of weeks – make sure you make the most of this and ‘piggyback’ your marketing messages around it, in order to leave clients in no doubt about who they should be contacting for quality advice.