How can borrowers beat the ‘Fog of Brexit’?

According to Mark Carney, the ‘Fog of Brexit’ is making predicting the next move in interest rates very difficult for the MPC.

Could that fog also be responsible for tipping the UK into recession in the near future?

With three lenders already stopped lending this year, citing difficulties with their funding lines, longer-term effects of Brexit have already started to emerge in the mortgage world.

Of the three lenders I mentioned earlier, one was a BTL lender, and another was a pure commercial property lender; the 3rd was a lender that covered commercial, BTL, bridging and development mortgages. We have been told there are others in the pipeline as well.

Whilst they were not market-makers, the fact that established lenders with credible track records are struggling is telling in itself.

International debt funds and other sources of wholesale funding (institutional funding) are not really sure what to make of Brexit. Whilst here in the UK we have no choice but to get on with it, a global investor has the luxury of choice. And it seems the easiest choice is to stop investing in the UK for now and wait until the Brexit dust has settled.

Whilst no one is predicting the contagion and lender contraction, that almost paralysed the credit markets in 2008 & 2009, there will always be a knock-on effect when established lenders cease lending. Others will get nervous and start to protect their balance sheets. As a result, we expect some contraction in lending volumes post-Brexit.

In addition, some believe the global real estate market is frothy and overdue a correction. Based on where we are in the economic cycle, history tells us that correction may not be too far away.

Current property prices are underpinned predominately by the cheap cost of, and the wide availability of funding. Parts of the global economy are stalling, and institutional money would prefer to stay out of the property debt markets for now, rather than take on unnecessary risks.

So, what does this all mean to the average Borrower? Well, the cost of funding is certainly going up for banks. With less money wanting to be in the UK at present, lenders are having to increase their consumer deposit rates to attract funds, and they expect this cost to rise further. The last time savings rates were as high as they are now was back in 2016. At the moment most banks are not passing on that higher cost to borrowers, but that can only last so long.

With fewer lenders and a higher cost of borrowing, borrowers are well-advised to start advancing discussions on their borrowing requirements now. Most banks will offer their loans for several months, so by starting an application now you can lock in today’s pricing for your re-mortgage and could possibly drag out completion until the autumn of 2019. If things turn out better than expected, then there’s no harm done.

If Brexit goes badly, having the certainty of a loan offer now is a very attractive hedge.

 

Author: Ian Humphreys

1^st May 2019

 

 

Photo Credit: Sandra Ahn Mode