Mark Harris
Chief Executive
After a tricky 12 months or so, there seems to be light at the end of the tunnel with the next move in interest rates likely to be downwards, following gloomy GDP figures.
The markets are pricing in quicker-than-expected rate reductions; we expect base rate to be heading towards 4 per cent by the end of 2024, down from its current level of 5.25 per cent, assuming inflation also continues to move towards its 2 per cent target. This would necessitate around three or four interest rate cuts next year.
The hold in rates at the last three meetings of the Monetary Policy Committee has drawn a line in the sand. This has resulted in an uplift in activity as borrowers are more confident about committing to a purchase. While affordability is inevitably tighter thanks to so many rate rises and the cost of living, finally it seems as though the worst of the pain might be behind us.
Subsequently, housing transactions should pick up next year but only marginally. We expect 2024 to be an improvement on 2023, which has been disappointing to say the least, but with the general election will come further uncertainty. We will probably look back on 2023 as the year where we saw the worst of it but equally there is unlikely to be a significant recovery next year, just slightly better conditions given that interest rates may well fall. While borrowers will be better able to plan ahead and stretched affordability will improve, 2025 and 2026 likely to be the ‘recovery’ years.
Lenders have been reducing pricing on new fixed-rate mortgages, a trend we expect to see continue. Both two- and five-year fixed rates are available from less than 4.3 per cent; considering the average two-year fix was 6.75 per cent and the average five-year fix was 6.23 per cent back in August, according to Moneyfacts, these rates are far more palatable and starting to look like reasonable value. Borrowers have to get used to a higher rate environment, but lenders may continue to reduce fixed rates as we head into the new year.
As well as reducing rates, lenders have been improving criteria with better loan-to-incomes and better terms for self-employed applicants. The new year will bring new targets and lenders who didn’t have a vintage 2023 will be looking to rectify that situation next year, which should bring further improvements in rates and criteria.
Many borrowers are due to come off fixed rates in 2024 and while pricing is moving in the right direction, they will still be in for a payment shock. The important thing is to plan ahead; mortgages can be booked up to six months before you need them so speak to a broker to find out what is available. If, by the time you come to take out your new mortgage, rates have come down further, you are not obliged to stick with the original deal and can choose a cheaper one.
Borrowers should regularly review their mortgage arrangements and the new year is as good a time as any. One client who took out a base-rate tracker some years ago was paying a much higher margin than is now available so while rates are higher than when he took the mortgage out, he was able to reduce payments by switching to a tracker charging a lower margin over base rate. Don’t simply assume you have the best deal; a broker will be able to run the numbers for you.
In terms of whether you should opt for a fix or a tracker next year, it depends on your situation and risk profile. If you can afford to take a risk, a tracker with no penalties at any time might be worth opting for, enabling you to switch over to a fixed rate once pricing becomes more palatable. Other clients who don’t want the risk of a variable rate are opting for shorter-term fixes of, say, two years in the hope that when they come to remortgage, rates will have come down and they can move onto a longer fix at a lower rate.
One final word on offset mortgages, which are a niche product but for the right borrower are particularly useful in this market. An offset mortgage is a great option if you have a significant amount of savings or even the cash to buy a property outright but would prefer not to tie it all up in your home. If the property costs £1m, you could take a mortgage for £500,000, for example, and keep the remaining £500,000 in a linked savings account. In this scenario, the borrower retains access to half of their savings but pays no interest whatsoever on their mortgage. The cash is available should they need money for building works, school fees or unforeseen circumstances.
For those planning a property purchase in 2024, it is more important than ever to seek advice from a whole-of-market broker such as SPF. The lending outlook is fast-moving; we look at all the options on the market, ensuring we find the best solution for our clients.