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28/11/2022

What's what in the mortgage market

 
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Usually the steadiest Eddie in the property world, mortgages have become the most volatile part of the market. Here is a catch up for buy to let investors.

Interest rates had been on a slow but steady increase throughout 2022 as the Bank of England's quest to halt inflation led to a succession of rises in Base Rate. The Truss/Kwarteng mini-budget then sent the mortgage market into turmoil. Here's what's been happening since.

Mortgage availability

At the beginning of September there were 2,000 buy to let mortgages on the market. A month later, this had dropped to 1,000. However, since then availability has improved, with Moneyfacts now reporting 1,800 products. Some 500 of this increase have been fixed rate mortgages.

Interest rates

Despite swap rates, a principal driver of fixed mortgage rates, having fallen back to the levels seen in early September, quoted interest rates remain elevated. Noticably, the major lenders in particular seem to be slow to bring rates back down. Currently, the average rate for a five year fix is at around 6%.

However, the last week or so has seen lower rates coming to market, with a number of lenders quoting close to 5%. It is expected that this downward trend will continue over the coming weeks.

5% is a significant number as this is the average rate during buy to let's boom period of 2000-07 and is often used as a 'rule of thumb' measure of viability.

Reduced loan-to-value mortgages

When assessing a buy to let mortgage application, lenders focus strongly on the ratio between a property's likely income potential and its mortgage costs. When doing so, they assume a 'stress test' interest rate typically 3% above their current rates. In many cases, the maths only work with a large deposit. Only in a few cases will the advertised 75% mortgage actually be available.

Rising rents and falling interest rates should go some way to addressing this issue over the coming months.

Outlook

Much will depend on the level to which the Bank of England raises rates to rein back inflation. Estimates vary widely, though one BoE committee member commented that it was likely to be considerably less than the 5.5% the market was pricing in at the time.

Capital Economics expect a slow but steady decline in mortgage rates, bottoming out eventually at around 4.2%. The new normal.


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