What will happen in 2023? UK Mortgage (Part 1)

UK Mortgage Market Insights 2022–2023

(Live from Sri Lanka – WIS Mortgages, Accountancy & Insurance)

Introduction

Suneth: Hi, this is Suneth.

Ifthikar: Hello, I’m Ifthikar.

Vidara: Hi, I’m Vidara.

Pradeesh: And I’m Pradeesh.

Thank you firstly for hosting us here in this lovely, beautiful country of Sri Lanka. I’m really enjoying myself here — and the high 29 degrees is great!

To understand what could possibly happen in 2023, we really have to rewind back to 2022.

Q1: What really went down in 2022? What were the rates like then and now?

Pradeesh: So Ifti, what really went down in 2022? What were the rates looking like in the beginning of 2022, and what are they like right now?

Ifthikar: It’s a shocker, to be honest.

At the beginning of 2022, rates were around 1%, slightly more for most people. We were seeing rates around that mark.

But 2022 has changed everything — rates have gone up from around 1% to about 4.5% to 5%. That’s the going rate at the moment.

A lot of people renewing their mortgages are now seeing rates of 4.5% to 5%, and even people purchasing properties are facing similar rates. It’s a shocker for everybody.

I can remember doing a deal for someone at 0.79% with a £199 product fee — that was very low! We even found deals at 0.8% and 0.9%, so quite a few people got rates under 1%.

However, they are up for renewal very soon, and they are in for a shock for sure.

All this has been part of the war, right? The war has kind of pushed people into this position. Financial markets are uneasy, the Bank of England is uneasy — everybody is uneasy at the moment. That’s what has pushed the rates up.

Q2: How did the Russia–Ukraine war impact interest rates globally and in the UK?

Pradeesh: Ifti mentioned earlier that the rates have gone up quite significantly and gave us the figures. The Russia–Ukraine war had a global impact on these rates. What were the macroeconomic factors manipulating these rate rises?

Vidara: Basically, the Russian invasion of Ukraine led to soaring energy prices in the UK and across Europe. People saw their bills skyrocket, and it’s expected to increase further by another 40%.

Not only that — we have China with a zero-COVID policy, which means Chinese exports have taken a beating. China, being the manufacturer of the world, has caused global goods prices to rise significantly, impacting everyone’s cost of living.

We also have Brexit — let’s not forget. Even though that was four years ago, supply chains are still disrupted.

All these factors have led to inflation skyrocketing in the UK.

In July 2022, inflation hit 10.1%, which is unprecedented.

Across the world, central banks are now trying to deal with high inflation by raising interest rates.

In the UK, the Bank of England raised rates by up to 3%, and that rate rise is expected to increase further.

Q3: What’s really happening in the financial markets right now?

Pradeesh: So, Suneth, I know you’re part of wealth management and insurance. What’s really happening in the financial markets right now?

Suneth: As you know, the markets have collapsed and are at an all-time low — it’s not very good right now.

But when I speak with investment managers, they are quite bullish. They still believe there’s a chance of good recovery. Obviously, no one can predict when, but they are optimistic about their portfolios.

Right now, the message is simple: be patient.

This situation won’t last forever. Markets will bounce back, the war will end, and certainty will return.

We’re going through periods of uncertainty, which causes short-term market dips and fluctuations. But in the long term, markets are expected to pick up.

If people have savings, it’s actually a great time to buy because markets are discounted — you’re getting in at the right time.

Of course, it could fall further — we don’t know — but what we do know is that markets are at all-time lows, so getting in now means you’re buying cheap.

For everyone already invested: stay invested. There’s no need to panic. History has shown us there will be peaks and troughs, but we will come out of this.

So if you’ve got savings in your bank accounts right now, make hay while the sun shines — isn’t it?

Q4: What does the cost of living crisis mean for mortgage borrowers?

Pradeesh: The cost of living crisis has become prominent around the world right now. How does this look from a mortgage point of view, especially for someone going for a new mortgage?

Ifthikar: It’s not really good for most of them.

The cost of living crisis started with soaring energy prices across Europe — and the UK, being part of Europe, was affected too.

With energy prices going up, many other associated costs also increased.

When banks realised this, they saw people’s expenses rise while interest rates were also going up.

So, banks decided to make the stress test more difficult.

A stress test is the internal rate at which they assess your affordability — even if your actual rate is 2% or 5%, the bank uses a higher “test” rate to ensure you can afford future increases.

That test rate has now gone up, putting pressure on borrowers.

So with both higher expenses and higher interest rates, affordability has become tougher.

Q5: What is a Stress Test?

Pradeesh: That reminds me — we did a recent video on stress tests, and many people still don’t understand what it means or how it works.

If you haven’t watched our recent video on Stress Tests and how they work — here’s a card to it! Click on it and get enlightened.

Q6: What were the toughest challenges brokers faced in 2022?

Pradeesh: 2022 has been quite challenging for many of us brokers. It’s been a bit of a roller coaster. What were some of the toughest challenges brokers faced over the past year?

Ifthikar: A lot has happened in the last year, especially the pressure on brokers.

The biggest issue was how frequently the market was changing.

We’d get an email at 4 or 5 PM saying “rates are changing tonight” — so if we had given a client a quote earlier, we’d have to rush to collect documents and submit the application before the deadline.

Our staff were often working until 11 PM, 12 midnight, or even 1 AM to get applications in on time.

Another change in the market was that people now want to fix their mortgages six months in advance.

Many banks now allow you to secure your deal 6 months early, so those planning remortgages can start early.

Because rates are changing so fast, many people come to us saying, “Can we do a deal now?” — even 6 months before their renewal.

Q7: Were lenders also under pressure? How did they handle it?

Pradeesh: That reminds me of when we had so many applications to submit and were overloaded — not just us, but the lenders too. We couldn’t get frequent updates for our clients. How does it look right now? Has it settled down?

Ifthikar: Yes, there was a lot of pressure on the banks too.

Whenever rates were about to change, a flood of applications would come in.

There were days when we submitted 7–10 applications in one day, which would normally take a week!

That pressure was also felt on the banks’ side.

Underwriters suddenly had multiple cases to handle each day, creating backlogs.

Some banks took 19–20 working days, and in some cases, we got approval only after 3 months.

It put massive pressure on everyone.

Things have settled down now, mainly because rates have started to come down slightly — even though the Bank of England base rate has gone up.

However, another issue we’re now seeing is that some banks have finished their quota for the year, so they’re taking fewer applications, which puts pressure on other lenders.

That’s the situation at the moment.

Q8: What can we expect in 2023?

Pradeesh: From what you’ve said, there’s been a lot of pressure — hopefully, it’ll ease in 2023.

Unfortunately, there’s expected to be a recession for the next 1 to 1.5 years, so it’s going to be a bumpy ride.

Let’s all hang on tight and take our Aces.

The climate here in Sri Lanka has been quite hot — but it’s a really, really beautiful country that you must visit.

Conclusion

So until then, it’s Pradeesh signing off — we’ll catch you guys in our next video.