With the direction of both interest rates and property transactions uncertain, next year is shaping up to be an interesting year one for the mortgage market.
We’ve talked to those in the industry to look at the likely trends borrowers will see in the months ahead.
Interest rate uncertainty
With significant uncertainty surrounding the Brexit process, it is difficult to predict what will happen with interest rates in 2019.
On the one hand, Bank of England Governor Mark Carney has signalled that the Monetary Policy Committee (MPC) will continue to gradually increase the base rate next year from its current level of 0.75%.
But he has also said it would be prepared to cut interest rates to support the economy in the event of a disorderly Brexit.
Mark Harris, chief executive of mortgage broker SPF Private Clients, says: “It looks set to be an intriguing year. We expect interest rates to end the year around 1% and mortgage rates will reflect this.”
But he adds that he does not rule out the possibility of the MPC cutting interest rates to kick start the economy if Brexit “goes pear shaped”.
By contrast, Ray Boulger, senior mortgage technical manager at John Charcol, is not expecting a rise.
He says: “I think the most likely scenario is Bank Rate remaining at 0.75% for most of next year, with the possibility of a small fall back to 0.5% if there is more uncertainty than we currently expect.”
Meanwhile, homeowners appear to be bracing themselves for rising borrowing costs, with David Hollingworth, of L&C Mortgages saying fixed rate deals account for 90% of the group’s current business.
Even so, Hollingworth concedes: “For a mortgage borrower, trying to second guess at the moment is even harder than normal.”
The mortgage market has been characterised by intense competition during 2018 and the coming 12 months are not expected to be any different.
Hollingworth says: “This year has been very, very competitive with mortgage lenders pushing hard to attract borrowers.
“I don’t see a reason why that would change in the new year and it might just be a tighter market with even more intense competition.”
Boulger agrees, pointing out that with new lenders coming into the market and existing ones wanting to increase their share, margins are likely to remain under pressure.
But with property transactions expected to remain subdued, lenders are likely to focus on people remortgaging, with this group expected to be the main driver of the mortgage market in 2019.
Competition is showing in a number of ways, with banks and building societies not only fighting for spots in the best buy tables, but also on fees, cashback deals and other incentives such as offering free legal work and valuations.
There are currently 1,459 cashback incentives available on residential mortgages, nearly two-and-a-half times more than in 2011, according to Moneyfacts.
Courting marginal borrowers
Another benefit of the high level of competition in the mortgage market is that lenders are no longer chiefly chasing borrowers with large deposits.
Mortgage rates for people with just 5% to put down fell to their lowest level on record in December, and at an average of 3.54%, interest on these deals was nearly half the level it was a decade ago, according to Moneyfacts.
Availability of deals for people borrowing 95% of their home’s value has also soared to 304 different mortgages, up from 217 a year ago.
Harris points out: “The premium between low and high loan-to-value mortgages is also narrowing. The rates on low LTV products will rise slightly as lenders try to earn greater returns.”
He adds that going forward he expects competition to drive further innovation in the mortgage market, such as lenders needing only one year’s accounts for self-employed borrowers.
Boulger predicts lenders may broaden their criteria to enable people who are not currently able to borrow money to do so.
He says: “There is a lot of scope for increased lending to older borrowers. I think that sector will grow relatively significantly in percentage terms.”
With further interest rate rises a possibility in the months ahead, homeowners are unsurprisingly opting for fixed rate mortgages over tracker or discount deals, but many are looking for longer terms.
The difference between the interest charged on a two-year fixed rate mortgage and a five-year one has narrowed significantly, with the average two-year fixed rate deal standing at 2.51%, while a five-year one is only slightly more expensive at 2.92%, according to Moneyfacts.
Harris says: “The premium you pay for the extra certainty of a longer fix has reduced, so longer-term deals offer value, but of course it depends on your circumstances as to whether this is the most suitable deal for you.
“Five-year money is still very competitive with plenty of choice at sub-2%, which is incredibly good value.”
Boulger says there is also increased interest among borrowers for 10-year fixed rate mortgages, with rates on these starting at under 2.5%.
He adds that while people have traditionally been put off this term by the prospect of having to pay redemption penalties if they exit the deal early, Coventry Building Society has a product that only charges these for the first five years.
Hollingworth points out that many lenders have also increased their ranges to cater better to different borrowers. He says: “Lenders are looking to make sure they have got an option for everyone, so they might have big fee deals with low rates, but equally they are looking to fill the gaps around that and have slightly higher rates but cut the fee structure.”
This move helps customers find the best value deal for their own circumstances, for example someone with a large mortgage may be better off paying a high fee to secure a lower interest rate, whereas for someone with a low level of outstanding debt, a cheaper fee and a higher rate may be better value.
A good time to remortgage
With competition high, interest rates remaining close to record lows, and further hikes to the cost of borrowing a possibility in the coming months, commentators agree it is still a good time to remortgage.
Rachel Springall, finance expert at Moneyfacts, says: “Throughout 2018 the mortgage market has had to absorb the base rate rise back in August, which has inevitably pushed the average standard variable rate (SVR) to its highest level in almost ten years.
“This has meant that the incentive to remortgage has probably never been greater.”
She adds that with the average SVR currently standing at 4.90%, while the typical two-year fixed rate mortgage is just 2.51%, a borrower with a £200,000 mortgage could save more than £3,000 by remortgaging in the first year alone.
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