After the chaos and volatility of the past year, I hope my friends and colleagues in the mortgage industry managed to rest and recharge over the festive season.
But now that Christmas has come and gone, our attention naturally turns to the year ahead.
In December’s issue of the Intermediary, I explained how I am much more confident going into 2024 than I was going into 2023. Today I want to discuss three trends that I think will emerge over the coming 12 months.
As we found out last year, crystal ball gazing can be a thankless task, given how quickly things can change quickly in the mortgage market. But here it goes anyway.
After two years of increases, it looks as though we have almost certainly reached peak interest rates. Now, finally, talk is switching to when rates will fall.
At the time of writing, markets were pricing in four quarter-point cuts this year, starting in the summer. That would take base rate down from 5.25% to 4.25%.
Given recent economy data, that seems a little overoptimistic at present.
Inflation is receding rapidly and, while economic growth has been up and down, private sector activity hit a six-month high in December, suggesting we may dodge a recession – for now at least.
However, as we know, things can change quickly. If inflation proves to be stubborn or it looks as though the economy is being hobbled by higher rates, the Bank of England will intervene.
I can’t see the Bank of England reducing rates until at least the second half of the year. And even if it does, those rates cuts will be smaller than the increases we witnessed last year.
Whether that translates into even lower mortgage rates remains to be seen. The cost of borrowing has already come down a lot over the past few weeks, due to falling swap rates.
It’ll be a relief to borrowers that many of the best residential are now well under 5%, which is a world away from where we were even a few months ago.
Will we see a sub-4% mortgage this year? I think that’s probably unlikely, although we can’t rule it out, especially if the Bank starts signalling it’s ready to cut rates.
Regardless, the mere fact we are talking about interest rate cuts is a positive for borrowers after two years where they have been rising.
UK Finance, the trade body, predicts gross lending will be 5% lower in 2024 than it was in 2023.
My gut tells me that is probably about right, although we may well be pleasantly surprised if the Bank of England intervenes and cuts rates.
In terms of volumes, 2023 came as a shock. Lending was down 28% overall, according to UK Finance. While lending is tipped to edge lower again this year, it’ll feel like a calmer market. Psychologically, it feels as though we are over the worst, even if that isn’t borne out in the data yet.
Borrowers are expecting rates to fall, so I expect transaction levels will remain anaemic in the first half of the year as borrowers bide their time.
Should that happen, we can expect a flurry of activity in the second half of the year as borrowers rush to snap up cheaper deals.
While I expect 2024 to be calmer, it will still be a challenging market and many borrowers will continue to struggle in a higher rate environment.
At the end of 2023 there were 105,000 people in arrears – a 30% year-on-year increase, according to UK Finance. The trade body predicts that figure will rise a further 23% this year.
Separate research by Bluestone Mortgages revealed last month that nearly a fifth (18%) of UK adults had missed a mortgage repayment, utility bill or credit card payment over the previous 12 months.
If this trend continues, more and more borrowers will fall foul of high street credit scoring criteria, meaning it will be a busy year for specialist lenders.
Thankfully, we have a thriving specialist mortgage market these days. Therefore, I’m confident there are solutions available for most borrowers. And brokers will play an increasingly important role in finding them.
Published in The Intermediary - January 2024