Market conditions – reclassifying the 'new normal'

What does the ‘new normal’ look like in the mortgage market?

The base rate had been sitting at around 0.5% for over 14 years and there are a lot of people who are not used to rates being at this new heightened level – now reaching 4% as of the latest BoE announcement on Feb 2.

From an affordability perspective, Hiten Ganatra (pictured), managing director of Visionary Finance, said it will be a real shock to those estimated 1.8 million people that are coming off their fixed rate deals this year, particularly in cases where rates are doubling.

However, he believes that consumers can mitigate some of the challenges they may face in 2023 by planning ahead.

Market conditions – who’s affected?

Reclassifying the ‘new normal’ will be an ever present theme in 2023, with Ganatra expecting a range of consumers to be impacted by difficult conditions until further stability comes to light.

For those on an average mortgage of £200,000, a doubling of interest from 2% to a 4% product could mean an additional £4,000 a year in interest, which is effectively over £330 a month extra.

With interest set to rise, exponentially for many, Ganatra said there are going to be affordability issues with respect to clients going forward, and he thinks it is down to advisers to make sure that they help manage and mitigate those issues with their clients.

Ganatra also expects to see advisers having difficult conversations with Help to Buy clients who have overstretched themselves to get a mortgage at the outset, and are now finding they cannot necessarily afford it given that they have to repay the equity loan on top of higher mortgage costs.

“Another challenge we are likely to be faced with is in the buy-to-let market, as the increased pressure and rising costs faced by landlords are being passed on to tenants, who are seeing their disposable income and ability to save being significantly reduced as the cost-of-living crisis takes hold,” Ganatra said.

He believes advisers need to make sure they keep tenant evictions low because tenants are facing multiple pressures too, but also ensure that landlords are being openminded and flexible while balancing their own affordability pressures.

Market conditions - overcoming challenges

In Ganatra’s view, borrowers need to start future planning and looking at ways to utilise the tools at their disposal to minimise any future risk and reduce their overall debt levels.

“This could mean using savings to offset against their mortgage balance or make monthly overpayments to pay down the debt so that when they do come to remortgage the property, they are not borrowing at the same level as at the start of the year,” he said.

If borrowers factor in rate rises and what this equates to on a monthly basis, Ganatra said they could try to clear a chunk of the debt by weaving it into their monthly budget in advance of those rates going up, which will put them in a better position when they come to remortgage later down the line.

Ganatra added that lenders also need to be more creative, adaptable and keener on their pricing and should start to look at ways in which they can be more flexible around policy and repayment profiles, such as offering interest only and part and part repayment plans in cases where affordability is tight.

“There is also scope for something more innovative, similar to policies seen during the COVID pandemic, where borrowers were offered a three month break on mortgage repayments,” he said.

In cases where rates have gone up and are impacting on affordability, for example, Ganatra said lenders could come up with a payment plan to maintain their existing mortgage repayment level and allow the borrower to defer the higher payments by adding them to the overall debt value for a grace period of six months.

“This would help bypass the immediate challenges of inflation and rising costs, and hopefully leave them in a better position where they can afford the repayments or switch on to a lower product if rates do start to drop at a later date,” Ganatra added.

Finally, he believes brokers can help by starting the conversation with clients earlier than usual and outlining ways to minimise risk, such as putting hints and tips in place that clearly explain what the client would pay if they remortgaged today and whether this could be factored into their budget now to help clear some of the debt sooner.

“This means that when the time comes to remortgage, they will effectively be borrowing less and be on a lower loan-to-value (LTV) band, which will significantly help with budget constraints at a later date,” Ganatra said.

Market conditions – responsibility to reduce prices

“Banks should be open minded and consider reflecting their policies accordingly by putting short-term measures in place to give some respite to borrowers,” he said. However, Ganatra warned the market must be careful that it does not go back ito the relaxed state of affairs that existed pre-credit crunch.

There are signs of global inflation falling, but Ganatra said he has seen quite a lot of instances where retailers and various different suppliers have been putting up prices despite the fact that global transport costs and fuel costs are coming down.

“This is concerning and does little to help address the challenges being faced by consumers; if prices keep rising just because they can, then I think we are in this for the longer term,” he said.

Ganatra believes that every sector across UK business has to take responsibility to help bring prices down and bring inflation under control, if the road ahead is to be bumpy for a shorter period of time.

What are your expectations for the market over the course of 2023? Let us know in the comments below.