How the mini-budget affected lenders and mortgage pricing

The two weeks since the Chancellor’s “mini-budget” or “fiscal statement” has been a time that few thought they would see.  As widely reported, following the budget, the pound fell through the floor and the markets have been in turmoil. This led to many lenders, including Landbay, being forced to pull fixed rate mortgage products.

It is not an event that is unprecedented though; every ten to 15 years or so, there have been other events that have rocked the UK economy and the mortgage world. 

Many of us will remember the credit crunch in 2017, where a sudden loss of confidence in the money markets led to the supply of credit drying up overnight and the mortgages becoming suddenly unavailable.

There are others who won’t remember these events however, so it is worth explaining just why these events have such an impact on mortgage lending.

Few outside of our market are aware of just how inter-dependent banks and lenders are, both on each other and on the money markets.  It is only building societies, and banks that have their own money to lend out as retail deposits, savings and investments fund them.  All other lenders are funded by either larger banks or investment funds via the wholesale money markets. Some of this may be from the capital markets such as pension and ISA funds, other times larger banks will look to diversify their own returns by providing funds to smaller, more specialist lenders such as Landbay.  The result is that if the markets or funders put their rates up or decide not to lend, then banks and lenders in turn do not have the money to lend out in the form of mortgages.

Most people reading this blog will be familiar with the term ‘swap rates’; these are the rates that lenders pay to access money to lend out.  These rates are calculated via the Sterling Overnight Indexed Average, otherwise known as SONIA. SONIA swap rates typically price fixed rate money over a number of different time periods including two years, five years and ten years, amongst others.

These rates change all the time, a bit like the value of the pound or shares.  When swap rates become too unstable, it becomes almost impossible for lenders to price their own fixed rates, which is why we have seen so many lenders temporarily withdraw rates.  A lender can’t, for example, price a fixed rate mortgage at 3% and then find they have to pay 4% for the money, as that’s a very quick way to find yourself out of business; but this was the situation that many lenders were finding themselves in, in the week commencing the 26^th September following ‘that’ budget.

Just to illustrate the turmoil in the markets, on Tuesday 27th September for example, swap rates rose by 90 basis points at one point – almost a whole percentage point in one day – before falling back to an increase of around 60 basis points.

Trade publication, Mortgage Solutions wrote a superb article looking at just how much swap rates had risen, up to Tuesday 27th when they proceeded to rise even further. The cost to lenders of five-year money had risen from just 0.68% one year before, on 27th September 2021 to 4.8% at the same point this year. By the end of that day, this had risen future to 5.5%, 70 basis points higher.  It was the same with two-year money; it had been 0.44% a year ago to 5.3%, and then finished the day at just short of 6%.

What is needed now is for the government to calm the markets, by working with the Office of Budget Responsibility and releasing a carefully costed budget.  As soon as there is some market stability, lenders will once again be able to release responsibly priced fixed rates.

What is almost certain however, is that we are likely to have seen the back of the ultra-low interest rates that we have become used to over the past ten years.  Far more likely is that the market once again moves towards a trend rate of around 5%.  While many economists expected this rise to happen, it was expected over a number of months and years not over a single week.

The role of mortgage brokers has never been more important than it is at the moment to explain to clients what is happening in the markets, to manage their expectations and continue to help them to find the lowest rate that they can at any given time.