Rising Rates Environment - One Lenders Perspective

Size: px

Start display at page:

Download "Rising Rates Environment - One Lenders Perspective"

Merilyn Smith
5 years ago
Views:

1 Rising Rates Environment - One Lenders Perspective PETER HILL CHIEF EXECUTIVE LEEDS BUILDING SOCIETY London Mortgages Forum 3 rd December 2014

2 What Will The Market Do? It will fluctuate, young man, it will fluctuate Attributed to J Pierpoint Morgan

3 Market Expectations for UK, US and euro-area Interest Rates CPI more likely than not to fall Spare capacity in the UK economy estimated at around 1% of GPD Market expectations for first BBR rise Q Sources: Bank of England, Bloomberg, European Central Bank (ECB) and Federal Reserve. (a) The August 2014 and November 2014 curves are estimated using instantaneous forward overnight index swap rates in the fifteen working days to 6 August 2014 and 5 November 2014 respectively. (b) Upper bound of the target rate range of 0% to 0.25%. Annual wage growth expected to be 1.25% 2014

4 Historic BBR Curves Market expectations of future UK BBR movements Source: Bank of England, Inflation Reports (conditioning path for market implied interest rates)

5 Japanese Interest Rates

6 Japanese Interest Rates

7 Impact of BBR rises: Back book mortgage pricing Front book mortgage pricing Savings rates

8 Historic Relationship between BBR, new lending and new savings rates Source: Bank of England

9 Back Book Mortgage Pricing Estimated 500bn on SVR Estimated 125bn on Lifetime Tracker Market average SVR of 4.39% - ranges from 2.50% to 5.99% If normal BBR is say 3.5% Will average SVR be 7.39% Will the range be 5.5% to 8.99%

10 Why is a significant increase in arrears unlikely? Many lenders have been using stressed affordability models in advance of MMR BoE unlikely to increase rates while earnings growth is subdued Lenders work proactively with borrowers and use profiling to identify vulnerable customers

11 What are the wider implications for existing customers? Desire to protect against future base rate rises More product choice Higher levels of housing equity Increased propensity to remortgage, especially from low rate SVR s & trackers

12 Implications for the price of retail funding The turning point for the price and supply of funding was in the summer of 2012 BoE liquidity regime / Sterling Monetary Framework Normalisation of Loan to Deposit Ratios Introduction of the Funding for Lending Scheme One year fixed rate bond pricing: January % May %

13 Developments in the wholesale funding markets Following the closure of the wholesale funding markets in the summer of 2007 Covered bonds were initially issued Followed by RMBS And finally, Senior Unsecured To support new lending, wholesale requirements are modest 25bn in 2014, rising to 61bn in 2017 supply is expected to significantly exceed demand

14 Front book pricing is likely to be tight Due to: Competition existing players and new entrants Subdued demand for mortgages Availability of cheap funding

15 To Summarise BBR likely to be low for a long time to come Relationship between savings rates, lending rates and BBR likely to normalise, in the long term Savings rates will stay low as BBR rises, but Front book rates will also be relatively low due to competition The range of Lenders SVR s will narrow Re-mortgage activity will pick up, due to motivated customers on low SVRs and trackers re-entering the market Arrears may rise, but only moderately

16 Of Course.. It could all be different!

September Economics Update. Economic and housing market. Bradford Property Forum. Created by:

September Economics Update. Economic and housing market. Bradford Property Forum. Created by: September 2014 Economics Update Economic and housing market Bradford Property Forum Created by: Bank Rate timing of first increase Q4 2014 or Q1 2015? The debate over the timing of the first increase to