Need a mortgage? Check affordability before chasing low rates

Early February brought good news for homeowners and buyers as mortgage lenders launched rates below 4 percent for the first time in months.

The mini-Budget chaos at the end of 2022 sent fixed rates skyrocketing to highs of more than 6 percent, and realtors and homeowners alike looked forward to when and how quickly they would fall back.

However, today’s cheaper rates may be short-lived. Swap rates, the financial metrics on which most lenders base their mortgage prices, are rising again.

Swap rates are an agreement between banks whereby they exchange one stream of future fixed interest payments for another stream of variable interest payments, based on a fixed price.

They usually show where the markets think mortgage rates are headed in the longer term and are discounted in home loan prices.

At the end of December 2021, the five-year swap rate was 1.10 percent, now 3.84 percent and is expected to continue rising.

In particular, the current rate is above the five-year fixed rate of 3.75 percent launched on Monday 20 February from the Mortgage Provider Platform.

The lender withdrew the rate less than 48 hours after launch, saying the high volume of cases affected its service.

“I wouldn’t be surprised if interest rates go up again,” said Lewis Shaw of mortgage broker Shaw Financial Services.

“The Federal Reserve [in the US] have almost said enough already that they are going to raise rates, which means the Bank of England will follow suit and then it’s like dominoes – government bonds go up, then swaps and then fixed rates. I would expect the headlines to disappear for a while.”

Chris Sykes, technical director at brokerage Private Finance, is a little more optimistic, suggesting rates could still fall as lenders continue to correct the “overprices” that resulted from last year’s chaos in the loan market.

Coventry Building Society this week cut some of its rates by up to 0.23 per cent and introduced a flat rate of 3.96 per cent for five years, on a 50 per cent deposit.

Look at lenders’ affordability rules, not just rates

However, low rates are not necessarily the most important factor for borrowers to consider. According to Moneyfacts, the five-year average fixed rate for all deposits is currently 5.02 percent.

Perhaps more important to individual borrowers are the affordability criteria a potential lender sets – in other words, the financial tests they run to verify someone’s ability to meet their future mortgage payments.

Many have changed their criteria over the past 12 months to account for higher interest rates and the impact of the cost-of-living crisis on household finances.

We can’t do anything about interest rates. The questions to ask yourself when taking out a mortgage are: is it affordable, feasible and sustainable,’ says Shaw.

Factors that lenders will consider include the relationship between your income and the amount you want to borrow, other expenses such as dependents, and your type of income, such as whether you are self-employed.

“Affordability is ubiquitous right now,” said Jane King, mortgage and equity release advisor at Ash-Ridge Private Finance.

‘Some lenders lend up to 5.5 times the income for higher earners, while everyone limits themselves to 4 or 4.5 times.

Some lenders restrict mortgages with a down payment of 5 or 10 percent, and others restrict flats, leaseholds and shared ownership. There are no guidelines.’

In addition, some lenders are stress testing at 3 percent above their standard variable rate [a moving rate that follows the base rate plus a fixed percentage] and some are milder.’

Inside Information: Knowing what lenders use to determine their affordability calculations is key to getting the best deal – and this is where a mortgage broker can help

Current economic conditions also favor those who qualify for a mortgage of more than 4 times their income, says Sykes.

“Client lenders are now writing more loans at lower income multiples so they have more flexibility at the upside for the cleanest and best cases out there.”

What to do if you need a mortgage

If you need a mortgage, the best way to approach it is to find an advisor who can review lenders’ offerings and work out the best deal for you.

They can also monitor the market as deals are added and removed, said Nicholas Mendes, mortgage technical manager at John Charcol.

Borrowers coming to the end of a flat rate can take out a new flat rate six months before their existing contract expires.

If a borrower finds that rates have dropped since they applied for their new mortgage, Mendes says they have three options:

1. Stay with the existing lender they have an application with and transfer to a new fixed rate as part of the remortgage.

2. Review the market to see if there have been any substantial changes. They can try to withdraw the current application and resubmit to a new lender at a lower rate.

3. Check out the options with their existing lender and make a product transfer instead if it proves to be a more cost-effective option.