Mortgage Update Q4 '16


Since the UK made a historic decision to vote in favour of Brexit, the financial markets have been reacting and adjusting to the implications of Britain’s future outside of the EU.

The Bank of England (BoE) has attempted to shore up UK economic confidence this month by cutting the central rate to the lowest ever in its 322 years of history. Here we consider what impact this is likely to have for UK mortgage borrowers. It may be that the rate reduction will have a limited effect as essentially the BoE has simply made cheap money slightly cheaper. As an example, the interest cost for an interest only BoE base rate tracker mortgage will see a reduction of £20.83 per month for every £100,000 borrowed.

Additionally, a number of mortgage holders may be in for a surprise; whilst the majority of lenders will pass on the benefit to borrowers, a few lenders have accounted for this eventuality and created a floor in the base rate they will honour of 0.5%. One likely market trend linked to the recent cut could see borrowers favouring more flexible mortgage products. Fixed rate mortgages have been largely similar in cost to trackers in recent years and the trend has been for borrowers to opt for security. However, recent events may see the tables turn as the Monetary Policy Committee has hinted at potential further rate reductions later this year.

Tracker mortgages generally have limited or no early repayment charges and a number of lenders offer a tracker to fixed rate service allowing a switch in product during the term of the mortgage. It may play well for those assessing their options to track the base rate and enjoy greater flexibility with the potential of cost savings to come. This may therefore present a highly attractive opportunity for a number of mortgage borrowers; albeit those who take steps to seek quality, expert advice.

That said, there could also be good news on the horizon for fixed rate mortgages as there is an expectation of further reductions in SWAP rates; the mechanism through which lenders can acquire funding over a period of time at a fixed price. This is a potential ‘unintended consequence’ of the lower UK GDP forecasts which have been prompted by Brexit. This gloomy outlook is the underlying force which will prolong the kind of economic uncertainty that will generally lower the cost of borrowing money in the long term.

Whilst our overall view is one of cautious and reserved optimism, we are keen to stress the importance of seeking independent, whole of market advice; especially while mortgage products and market forces are exposed to a variety of ever changing economic factors.