Let’s worry for mortgage borrowers not on a fixed rate – what can/should financial advisers be doing?

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Having written, last quarter, about the FCA Dear CEO Letter titled “The rising cost of living – acting now to support customers”, I was very reluctant to cover any subject that could be considered close to it this quarter.  But I can’t let the further hike in Bank Base Rate [‘BBR’] go by without any further comment.  The Bank’s direction of travel, if there was any previous doubt, is now crystal clear as evidenced by the fact that three members of the Monetary Policy Committee [‘MPC’] preferred to increase BBR by 75 basis points to 2.50% rather than the agreed 50 basis points to 2.25%.  Elsewhere in the world, the US Federal Reserve have raised interest rates by 75 basis points for the third time in three months and have also promised further tightening as it ramps up its fight against persistent inflation.

So there you have it, the BBR is now at its highest level for 14 years.  Worse, the minutes show that the MPC will take the actions necessary to return inflation to the 2% target, and while the MPC policy may “not be on a pre-set path” there is a clear message that if the economic outlook suggests more persistent inflationary pressures, including from stronger demand, the Committee “will respond forcefully, as necessary”. The clear message from the previous MPC members doing the media rounds is that we can expect further increases.  This is supported by the fact that market-implied expectations are now peaking at around 4.75% by mid-2023.  For balance, the median expectation is 3.50% by March 2023.  Even if the outcome matches the median prediction, rather than the peak expectation, that is still a further increase of 1.25%.

No one can predict the outcome of the tension between rising costs (generally and directly resulting from BBR increases) and the Governments tax give away dice roll. 

Clearly the ‘give aways’ in the recent ‘mini-budget’, which wasn’t that mini as it was the biggest tax cutting budget since 1972, might soften the BBR blow for some.  While the term ‘throwing the kitchen sink at a problem’ underestimates the level of the Government intervention and, of course, certain stimuli may help some borrowers it is not surprising that many existing borrowers, who are not on fixed rates, are concerned about the monthly increases they are facing.

What does this mean for financial intermediaries?

  • New business. The stamp duty threshold increase might support a revived income stream from a resurgence of first-time buyers, but that is dependent on a positive ‘supply side’, in the form of new build properties to purchase, or a ready market of homeowners trading up.  From lenders’ perspectives, because of the cost of living crisis, they are already seeing ‘pipeline completion hesitancy’ and many, fearing an uptick in default rates have tightened affordability models.
  • Existing customers. Now is the time for advisers to show their worth, in my humble opinion. For decades, intermediaries have battled with lenders over who ‘owns’ the client.  Relationships between the intermediaries and lenders have, in some cases, become ‘tetchy’ at various loan milestones, such as at the end of a fixed or discounted period.  A fragile truce was achieved when lenders started to pay ‘retention’ procuration fees.  If there was ever a time for financial advisers to be proactive, it’s now – particularly where they know borrower customers are close to ending a fixed rate or are already on a variable rate.  There are numerous regulatory updates, past and present, to support such contact.  These include Dear CEO letters (especially the one titled “The rising cost of living – acting now to support customers”), Final Guidance documentation (especially FG21/1 which built on the work of the Money Advice Trust) and various TCF and vulnerable customer advice notes.

No one can predict the outcome of the tension between rising costs (generally and directly resulting from BBR increases) and the Governments tax give away dice roll.  However, what we all know is real households are struggling, even before baked in increases hit in the autumn and winter.  My message is clear, professional financial advisers, who care about existing customers as much as they do about chasing new ones are part of the solution and not part of the problem.

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Partner - Baxters Business Consultants - a business consultancy undertaking marketing, training, freelance journalism and expert witness services to the residential mortgage lending, building society and financial service industry (April 1993 to date) - www.baxtersbc.co.uk.

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