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How to Get Away With Just a Mild Case of Mortgage Pain

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That was the most positive comment I heard speaking to UK mortgage specialists this week. The recent turmoil in the gilt market has made securing real estate financing a high-wire act.

One of Britain’s largest lenders, NatWest Plc, actually hiked lending rates on its most popular mortgages on Monday amid new Chancellor Jeremy Hunt’s first address to the House of Commons. It doesn’t take long for risk managers to sound the alarm when interest rates rise as sharply as they have in the past two months. Most mortgage offers are binding for up to six months, so it’s understandable that lenders would withdraw the most attractive offers and wait for the dust to settle before proactively competing again.

Ten-year gilt yields have more than doubled to around 4% since mid-August. By the time Hunt dropped his predecessor’s tax plans, the returns had been even higher. The interbank swap market, the benchmark for banks’ funding costs with fixed income businesses, is around 5% for maturities of one to five years.

Most mortgage offers are now above 6% on the face of it. A year ago, it was possible to lock in a five-year fixed rate of just 1% for a short window, but base rates were just 0.1%. Those days are long gone, probably forever. Now many offers are intentionally unattractively priced to avoid deals, so it’s wise not to interpret too much into averages or scary media reports.

But prospective homebuyers rarely ask for an average offer. You want the lowest competitive price available. And according to Peter Tsouroulla, Head of Mortgages at Trinity Lifetime Partners, it’s still possible (through a well-known lender like Nationwide Building Society) to get a five-year deal with an 85% LTV at 5.39%. a financial advisory firm in London. This rate improves to 5.19% for an even longer 10-year term (based on a 25-year lifetime mortgage).

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But things will eventually settle down.

The real trick, if you can handle a little more heat from higher interest rates, seems to be opting for a tracker mortgage. These are tied to the Bank of England’s base rate (which is expected to rise to at least 3% on November 3) with a credit premium of 0.75% to 1.25%. NatWest and Barclays Plc both offer 2-year trackers at 3% (this will rise in line with base rates). All mortgages revert to lenders’ standard variable interest rates once the fixed or teaser term ends. Because these are typically significantly higher than advertised fixed rate deals, most are refinanced immediately.

In times of stress like this, it can become almost impossible to get a loan if unusual complications arise, such as: B. a low down payment, bad credit history, or irregular employment. With annual rental rates often lagging behind mortgage costs, the buy-to-let market has become more illiquid as lenders pull back from potentially riskier loans to landlords. With tightening regulations on tenant move-outs, securing underlying collateral quickly has become more difficult. Lenders are notoriously pro-cyclical in their fears, reducing cash flows in tough times and usually exaggerating in boom times. So it’s worth the wait if you can bid your time.

Although official interest rates are unlikely to have peaked yet, sterling money markets have already priced in a much higher level of around 4.5% and mortgage lenders have priced all of this in. In fact, interest rate expectations in the UK are ahead of most economists’ expectations, eventually peaking at around 4% and starting to decline by 2024.

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Of course, mortgage providers value existing customers with a decent track record; So new borrowers and first-time buyers may find it more expensive than a new homeowner mortgage. But eventually, greed will once again overcome fear when volatility in money markets subsides. Patience is a virtue when you want to better finance a roof over your head.

More from the Bloomberg Opinion:

• Truss squanders Thatcher’s legacy on homeowners: Therese Raphael

• The UK rental market is broken but not beyond repair: Stuart Trow

• Buying a house now wouldn’t be a bad idea: Teresa Ghilarducci

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. Previously, he was Chief Markets Strategist at Haitong Securities in London.

For more stories like this, visit bloomberg.com/opinion

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