The current economic climate means that lenders are being forced to make quick decisions, so it’s important for borrowers and brokers alike to understand why the rate they see today may not be available tomorrow. 

The last few years will surely be remembered as some of the most economically volatile in modern times. Here in the UK, the fiscal fallout from Brexit was still being felt when the Covid pandemic rocked economies around the world, shortly followed by Russia’s invasion of the Ukraine.

Each of these once-in-a-generation events, happening in relatively quick succession, has contributed to unstable market conditions. Lenders are constantly reacting to the market in order to protect both their businesses and customers.

Understanding some of the factors driving this can assist in informing conversations with clients, hopefully helping them to make informed decisions and minimising frustration that understandably arises when a product is suddenly withdrawn.

Particularly useful here is a basic understanding of swap rates.

Swap rates refer to the price paid by lenders to other financial institutions to fix rates offered to customers, over an agreed period, usually two, three, five or ten years.

When lenders offer mortgages with interest rates that are fixed over a certain period, their returns are at risk of being negatively impacted if the cost of funding rises. The swap rate helps to mitigate this risk for lenders by locking in a cost of funding over the fixed period, with this financial security incurring a cost.

Swap rates are derived from the markets expectations of what interest rates will be over the term. This means that as well as the Bank of England’s base rate of interest, events like global health crises or major conflicts can all have an impact, alongside changes to supply and demand of essential items like food and energy.

An important point to note is that swap rates are constantly in a state of flux, changing by the second, so in a market as unsettled as the one we’re experiencing currently, lenders are being forced to frequently re-price products.

If they don’t do this, they can find that the margin on the product they were offering has suddenly been slashed. This effect can also be exacerbated by the delays in the system that we have seen since the surge in activity caused by the Stamp Duty holiday.

A lender can agree a mortgage at a given rate but with other parts of the process, such as conveyancing, sometimes taking months to complete, the swiftly moving market may mean that the previously competitively priced product is now making a loss.

While withdrawing products can lead to frustration for brokers and clients, such losses are clearly unsustainable – a thriving industry is better for everyone so it is unfortunate to see some lenders forced to suspend their buy-to-let lending due to what it called unprecedented increases in the cost of funding.

And it isn’t just about lenders’ bottom lines, if products are priced well below those offered by the rest of the market, they attract surges in business volumes that are not possible to process within acceptable timeframes, leading to poor service, again to the irritation of brokers and borrowers.

Of course, this is very much a simplified look at what is a complex issue. While it’s probably not necessary for mortgage intermediaries to know the nuances of how different lenders are funded and how this impacts the products they offer at any given time, I think brokers can benefit from having a grasp of the subject.

While we don’t want clients to feel like they are being given the hard sell “don’t delay, buy today” line, we do need to help them understand why the current extraordinary economic climate means that the products they are offered today may not be available tomorrow.

 

Richard Rowntree
Managing Director for Mortgages
 

This article first appeared in Mortgage Introducer