Credit Conditions data Q2 2022

ended 14. July 2022

Tomorrow morning at 09:30, the Bank of England is publishing its Q2 Credit Conditions report. The report covers the demand, supply and pricing of mortgages. Clearly lenders have been hiking rates like there's no tomorrow recently, so with this in mind:

  • How did demand for mortgages hold up during the second quarter of the year? Still strong? Starting to wane a bit? And why, obv?
  • And the supply of loans? Were there more loans in Q2 than in Q1 or did lenders start to pull back a bit (due to affordability or service level concerns)?
  • And the big one… What's been happening to the pricing of loans in Q2? Up and up we know. Any examples comparing a mortgage in June 2022 to June 2021 would be useful, with the repayment differential in pounds.
  • Are rates going to keep rising, and if so by how much? Are we headed back to pre-GFC levels? What can we expect at the next rate meeting?
  • Also, are you seeing any defaults or is that likely to happen when people come off their current fixed rates and into financial armageddon?
  • Lastly, are you seeing examples of rate shock among clients yet?

No need to answer all the Qs and DO NOT write an essay FFS. It's been like reading War and Peace on repeat lately. 2-3 pars will do the trick. Remember: journalists want catchy soundbites, not John Stuart Mill. x

6 responses from the Newspage community

Demand for mortgages was strong across the board during Q2, particularly remortgages as owners stampede like wildebeest to try and lock into the lowest rates going and mitigate the increases to their monthly payments. This is due to the perpetual rise of fixed rates for the past three months with lenders battling to get out of the firing line of more business than they can handle. Unfortunately, the writing is on the wall, rates will to continue to rise and lots of mortgage holders will experience the equivalent of cold water shock when they come to renew. It’s certain Threadneedle Street will increase bank rate in August and, as a betting man, I’m expecting a 0.5% increase.
Demand for mortgages right now is hotter than the current heatwave. Existing homeowners are desperate to fix into a new deal before rates rise further, and the prospect of future rate rises has also been a fillip for first-time buyers looking to get onto the property ladder. They want to lock in, get on the ladder and live in their first homes. Demand shows no signs of cooling down and supply remains strong. We're also seeing some lenders price themselves out of the market on purpose for a while to ensure they can maintain service levels.
As many people will know, rates have risen sharply during 2022 to date. Clients remortgaging at the moment are coming off fixed rate deals at a little over 1% and the very best fixed rate deals they can get are now over 3% in many cases. It even has a name: “rate shock”. There are a couple of oddities within all this however: many lenders I have spoken to have said that much of the increase in interest rates is about service, more than the underlying cost of funding. They are simply so busy that they are increasing rates to try and reduce the volume of applications coming through the front door. The second oddity is that the sharp rate rises appear to be confined to fixed rates. This time last year a variable rate deal (be it a tracker, or a discounted rate) was about the same cost as a fixed rate. Now, however, fixed rates have been rising far quicker. In one case I researched recently, the client's best fixed rate option was at around 3.5%, but a discounted rate with the same lender was just 1.85%. That’s 1.65% of headroom to absorb future interest rate rises, before they even match the fixed rate, let alone exceed it. Not for everyone, but certainly an interesting change in the market to note.
Borrowers have been keen to lock into rates quickly as lenders upwardly reprice. In this sense, we have seen healthy remortgage activity and some robust purchase applications as people are incentivised to move. Equally, we have also seen some potential buyers put their plans on ice, expecting the increased interest rates to put pressure on households which, in turn, will result in quality stock coming to the market at a reduced price. Lenders have not pulled out of the market but, with the major ones hiking rates, we are seeing borrowers head for lesser-known lenders who are still offering slightly lower rates. Swap rates decreased from 2.8% last month to approximately 2.35%. However, lenders will be hesitant to lower pricing with further rate rises on the cards, and no lender will want to hit the top of the best buy tables, exacerbating recently slow service levels. The better-than-expected GDP data and the UK's stubborn inflation levels will mean further rate rises will be on the cards. Borrowers whose rates are expiring next year are concerned: this is understandable with the likelihood of their mortgage rates tripling from pandemic levels. However, 25-year repayment mortgages should only see 26% increase in monthly outgoing despite the 200% increase in interest rates. Current rates also represent good value when compared with long term averages, which borrowers do appreciate.
Demand during Q2 certainly remained high. However, during the later parts, we've seen the focus switching from people looking to move to people wanting to secure a new fixed deal as early as possible. Lenders are increasing rates on a weekly basis at the moment, but this isn't purely down to the base rate changing. People's fear that rates will keep increasing has created a huge spike in applications from customers securing mortgages earlier than normal, which has resulted in a bottleneck where lenders can't process applications quickly enough. The end result is lenders are trying to manage the flow of applications by making their mortgages more expensive. Sadly, this is creating a domino effect due to the fact the next cheapest lender soon get swamped and withdraws their deal on offer. We're seeing clients coming off rates in the low 'ones' and now being hit with rates above three percent. Though historically rates remain low, the fact mortgage balances are now being so high is resulting in a few hundred pounds per month being added to a borrower's expenditure. This, added with the price increase in fuel, energy, and food, is seeing more and more borrowers in a state of disbelief at being put under this additional strain.
On the demand side, it's been pretty much business as usual in terms of buying activity. Much like the Immortals who fought the Spartans, if one buyer drops out another replaces them in the battle for bricks and mortar ownership. UK demand still exceeds supply and market forces will have to try a heck of a lot harder to curb buyer enthusiasm.