Commercial Finance – Market update
Last week the Chancellor announced UK homeowners could expect mortgage payments to increase by an average of £1,000 per year as interest rates are predicted to rise to 2.5%. As the Bank of England raised the base rate from 0.75% to 1.0% in a bid to tackle record levels of inflation, we asked Pilot Fish Directors how the situation is impacting the commercial markets.
John Shevlane, Pilot Fish Director and commercial finance specialist shares what he is seeing across the investment market.
What trends are you seeing across the commercial lending space?
We saw an immediate reaction following the BoE Monetary Policy Committee’s decision to raise the base rate in March 22. As interest rates rose from 0.5% to 0.75%, high street lenders immediately responded by increasing rates across all products ranges.
Alternative lenders were slower to react and competition between the high street and the alternative lenders increased. However, following the latest interest rate increase from 0.75% to 1.0%, it’s likely we’ll see that gap start to close as the cost of wholesale funds increases.
Have you seen rates increase?
Rates have increased across all commercial products by an average of 1.6% over a twelve month period. This is due to lenders passing on the cost of wholesale funds to the customer.
High Street lenders determine their pricing on the cost of funds from LIBOR, i.e., the base rate, plus their margin. When the market anticipates future increases to the base rate, fixed-term products begin to build in the expected increase.
The below chart outlines the cost of funds from Jan 2021 to date. We can see prices across fixed term products are rising in line with the anticipated increases to the base rate.
Do you expect to see further changes over the next 12 months?
Fixed term products are already reflecting anticipated rate increases over the next twelve months to around 2.0%.
We’re unlikely to see a sharp increase in rates, but would expect rates to continue to rise by 1-1.5% across all products over the next year as lenders adjust to increasing base lending costs.
What can investors do to best prepare?
Investors can opt to refinance at the earliest opportunity. We have seen an increase in portfolio landlords refinancing when their existing fixed terms are coming to an end, or even sooner in some instances, as they seek to lock in current rates and gain certainty over profitability.
Investors should keep in mind that current rates are not locked in until a formal offer is received, which can take up to three to four weeks for mortgage applications.
Our commercial team offer complimentary market assessments to all clients who are seeking to review available finance options. Drop us a message and an advisor will be in touch.