Mortgage Insider Podcasts | Barclays Intermediaries

The UK Economy – Stick or Twist

Hi, Phil Spencer here, and this is Mortgage Insider from Barclays, the podcast series for mortgage brokers. I'm a property expert and sometime TV presenter, and I'll be using my experience to get to the heart of the biggest issues in the mortgage sector. I'll be joined along the way by industry leaders, brokers, and indeed Barclays own experts, who'll share their insight and expertise to help you navigate the challenges, changes, and opportunities in the world of property.

Stick or twist, that's been the dilemma for central bankers since our last episode went out in June. Economists and experts across the housing market have been pouring over the data and hanging off every word said by those at the Bank of England, trying to determine the direction of the economy and, of course, the housing market.

To try and unpick the current economic position and help us understand what it all means for brokers, I'm joined by friend of the show, Will Hobbs. Will is the Chief Investment Officer at Barclays Wealth and Investments.

Will, great to see you again. Thank you for coming in. So, we spoke last time in May, and it feels like another lifetime. There's been more ups and downs in the global economy than I've had breakfasts, I think. Inflation has gone down a touch, but the base rates has gone up. I think Jeremy Hunt said recently that the UK's financial situation is worse than in the Spring but give us your view. What do you feel has changed in the UK economy since we last spoke back in May?

WH: I would say I'm just a tiny bit more optimistic about the outlook for the UK economy than I was.

PS: That'll do.

WH: Yeah, just end the podcast there and I'm probably the only economist that ever going to say that. In the team that I'm lucky enough to work with, we're always forcing ourselves to think about a range of probable outcomes from the moment in time. The media, for the most part, is incentivised to give us bottom case scenarios isn't it because bad news sells, the old adage says so.

You really have to make an effort to see what could go right and remember you've got to treat the economy as innocent until proven guilty because growth is the norm, not the exception. And that's because most of the time, humankind is inventing new stuff and getting better at using that new stuff, and you've really got to find reasons to bet against us rather than with us.

At the moment, the interesting thing about the UK economy, Europe and the US to a degree is inflation adjusted wages. Nominal wage growth has been submerged under inflationary pressures, so, in real terms, we've been losing money famously for some time. Now, actually on a year-on year-basis, UK, European and US consumers are now enjoying positive real wage growth, which is quite a big deal I think. Now obviously central banks are trying to sort of slow it down but what you're finding is inflation comes down and where the unemployment backdrop stays tight then positive real wage growth is good news, and it's an underestimated thing.

PS: So, that's we're not reading about that in our newspapers.

WS: Well, why would they in a way. I think we're much more absorbed and the more I think about this the more it seems to make sense to me. You look at the economy, we're inveterate pattern spotters, aren't we? I always sort of wonder who really thinks that constellation of stars looks like a plow and the same is true of economics and markets to a degree.

We’ve only really got plausible economic data in the post-war period, probably even more recently than that and you've never got enough data, enough economic cycles to really make cast iron rules. So, what you're doing is mixing what the economic data tells you with intuition and what makes sense. As a result, we're now looking at this kind of, you know, you raise interest rates, that makes saving more attractive, spending less so, and you're just sort of looking for patterns.

And I think the economics community and I think the media as well, they just become obsessed by looking for proof that they are right. Their theory, their understanding of the world is right. But my feeling is that it's different every time.

PS: You'll do yourself out of a job in a minute.

WH: It's already happened, that's why I'm here.

PS: But of course, there is also public sentiment and what people feel like doing, regardless of perhaps what they should be doing, or what the economic data or whatever they're reading in the newspapers tells them to do

WS: That's a great point, Phil. I think we touched on this last time but, quite often, the pervasive gloom can translate Into economic activity and doomerism is a thriving trade in the UK in particular.

We love to talk about the decline and fall of the UK, the UK economy and so on. But I'm of the opinion that it's not that bad stuff can't happen and it's not that interest rates can't slow the economy, but we need to keep in mind that it's not just different this time, it's different every time. But this time might be particularly different because of the pandemic and all that changed about us, about institutions, about what we've got in terms of savings arsenals, it's still pervasive.

So, we want to be wary of just sticking to the rules because that makes us feel comfortable and trying to make sense of the kind of splattered chaos of economic data. We often feel uncomfortable in front of it so we force it into the latest economic model, the most fashionable one, and it makes sense again.

PS: But you're feeling more comfortable, more settled?

WH:. Yes, a little bit. I think that we're a little bit further through digesting that interest rate burden. What is it? 8 million households, roughly speaking, with owner occupied mortgages. You're about halfway through that in terms of adjusting those interest rate costs and the consolation we've always had along those lines, and it's not a perfect matchup, is that those mortgages and the excess savings are clustered in the top 40% of households. So, there is asset meets liability to a degree. That doesn't mean it's perfect and it doesn't mean it won't change people's spending or intentions but just that we want to be wary of the kind of real doomsday stuff going around.

PS: But that, as a given, we've also got interest rates at the highest level they've been for 15 years. Is there any evidence to suggest that they have peaked? Or is that going too far?

WH: I think we're close to it, I mean, that's what we said last time that there was probably a bit more to go, understandably you wanted us to say it was it was over, we all want it to be over especially those of us looking at repricing our mortgages. The interesting thing about interest rates is - well, there are several interesting things about interest rates – but there’s this study that I reminded myself of the other day. It's called eight centuries of interest rates by a guy called Paul Schmelzing, it’s 200 pages of pure, pure, beautiful stuff. But the interesting implication of this is that there is a kind of downtrend of several hundred years in real inflation adjusted interest rates, and it's pretty much insensitive to monetary policy, fiscal policy, political setup, all those kind of things.

So, real interest rates may just dance on a longer-term to a tune we can neither hear nor control. So, that's just something to bear in mind with regards to the longer-term story. Slightly contradictory, but another thing to bear in mind with regards to interest rates is that they can have, on the way down and on the way up, self-fulfilling effects. So, there is now some evidence to show that ever lower real interest rates actually reinforce themselves to a degree.

Low real interest rates beget low real interest rates and the same might be true of higher real interest rates, because what comes with higher real interest rates is that if you think of an economy having finite amounts of precious capital to deploy, what you want in a way is a hurdle rate that's quite stiff, you want the best projects to survive rather than all projects. So, in a sense, there's a kind of stiffer penalty for not being the best idea, not being the best company and that can help redistribute capital more effectively, which can help growth.

To answer your question, I do think interest rates are sort of there or thereabouts. There may be another few bits and bobs here, but we're a lot closer to the end than we are to the beginning on that front. Will they come back down sharply? I personally don't think so. You'd need a sort of sharper recession or correction in order for that to happen. So in a way, it's a positive thing that I think they won't.

PS: Have you any idea what the long-term average interest rate is or even post-war? It just feels to me like we might be about there.

WH: Yeah, we're not a million miles away from it. The real point that you would make is that it's the last decade that's the weird one.

PS: Yes, completely and actually, where we're at today, we might just have to get used to it.

WH: Remember that the interest rate doesn't operate in a vacuum, it reflects all sorts of other things about the economy, like the growth rate. So, how much return you can get or where wages are going or all sorts of other things. In a way, I think people get fixated on the idea that everything else is the same, but this is more expensive. Whereas, in a sense, that's probably not quite the right way to do it.

We talked about last time, the reality, the potential for productivity to pick up again. Now that would drive higher interest rates because it would mean a higher equilibrium rate for the economy that balances everything. I don't want to get too chimpy about it, but basically higher real interest rates doesn't have to be a bad thing. It can just be a difficult kind of thing to transition to.

PS: Should we be looking abroad, and I'm thinking particularly to the US and to Europe for indicators of what direction the UK economy is likely to be heading?

WH: Very much so. I mean, if you're looking for the sort of single largest slice of demand for global PLC, it's the US consumer, US households. That is usually where a lot of the economic weather comes from for the rest of the world. And for the UK, we need to remember that we are a small open economy. That means you get a lot of weather from outside and the good news there is that the US is seemingly doing pretty well.

Again, that's not to say stuff can't go wrong, but the interesting thing is that US central bankers have basically put a brick wall in the path of the US economy and it just seems to have crashed through it. Now it seems to be accelerating somewhat, which is kind of weird and quite a lot of economists are turning around and saying, well, it's just the kind of road runner moment. You know, so you're out over open air and the economy doesn't realise it yet so it's going to plunge into the abyss before too long.

But that may again just be this mistaken instinct to try and keep on proving yourself right on no real evidence and actually what you're seeing is interesting in the US economy in that we’re seeing quite a sustained pickup of investment in intellectual property and research and development, again, associated with these trends in artificial intelligence. So, that should be getting people a bit excited in some way.

PS: Of course, there are elections coming up in America and also here in the UK.

WH: Yes. Although again, I'd be wary of saying that we could second guess it. Yes, there will be impacts, not all perfectly called ahead of time, at least one of those democratic candidates can be mercurial. There can be a big difference between stump box rhetoric and implementable policy. That's part of the point of the kind of checks and balances to a degree.

I've long since learned to not try and call elections, you can make a fool of yourself pretty quickly. But I would say that, generally speaking, the forces that drive economies and are kind of household outcomes, most of the time, it's not necessarily about which political party is in power. Most of the time in most democracies, your political authorities are given. The ability to change the distribution of outcomes, which households versus other households somewhat, but not necessarily the trajectory of the economy. For instance, when you talked about the history of interest rates post war in the UK, the fascinating thing is that the trend growth rate of the UK economy has been absolutely stable through all sorts of administrations of all flavours.

PS: So, they can tinker around the edge?

WH: Yes, quite a lot of the time and that's not to say it's not possible that you get big ruptures and there are important decisions in the US. Although the president’s powers are quite constrained domestically by various checks and balances. Internationally, there is more unfettered power which can be dangerous and can be difficult to absorb. But I'm not sure whether this moment we should wonder whether it's more dangerous than ever, there's always going to be enough bad news to fill a 24 hour news feed. Simple as that. The world, the planet, as big as it is, I'm not sure whether that's reflective of the trend and whether we're actually living in more dangerous times or whether it's the appearance of such.

PS: Can we just look ahead to the end of this year going into 2024. The Institute of Physical Studies is apparently predicting a moderate recession in the first half of next year, what would you say the key things that brokers should be following and paying attention to?

WH: Yes, that is possible. We've had some data out recently showing that business confidence is still pretty low in parts of the UK economy. Those same indicators have been of less use in recent times than they were previously, just to be aware. You're finding in the next couple of quarters, going into next year, that interest rate headwind is peaking. So you're at the peak kind of right now in terms of pressure.

If there is a price to pay from these interest rates in terms of a recession, then it probably would be in the next couple of quarters. Again though, remember that real wages poking their head into positive territory is a much under underestimated thing, especially in consumer-led economies like the UK and the US where around two thirds, or more than two thirds, is kind of consumption based.

Don't get too gloomy and I think the thing for brokers to look out for is that you can get yourself in a real tangle trying to say whether the Sonia, whether the interest rate curve, is telling you the truth or not, and which bits you disagree with. In a way, I would almost be tempted to just take that as a reasonable indicator of where interest rates might go and just focus on the day job to a degree and not get too caught up with forecasting or whatever. The most important message I would continue to give is don't buy into the kind of doom narrative on the UK. Yes things can go wrong, but there's plenty that could go right as well and that's not going to be talked about as much in the media.

PS: Always great to hear from you, thank you for coming in. Will is the Chief Investment Officer at Barclays Wealth and Investments. The views expressed by external guests in this podcast are their opinions only and do not necessarily reflect the views of Barclays.

Thanks for listening to Mortgage Insider. I'm Phil Spencer and this has been a Fresh Air production for Barclays. Please do rate, review and follow wherever you get your podcasts. Talk to you next time.

How do lenders really set their rates?

Hi, Phil Spencer here and this is Mortgage Insider from Barclays, the podcast series for mortgage brokers. I'm a property expert and sometime TV presenter, and I'll be using my experience to get to the heart of the biggest issues in the mortgage sector. I'll be joined along the way by industry leaders, brokers, and indeed Barclays own experts, who'll share their insight and expertise to help you navigate the challenges, changes, and opportunities in the world of property.

Over the past few years, we've seen interest rates creep up to their highest level for 15 years. The decision taken by the Bank of England on interest rates is one of the biggest factors when it comes to the interest rates paid by mortgage holders. But how does the decision taken by the Bank of England actually impact mortgage rates and how do banks set rates? And how much of that decision is based on the Bank of England's base or bank rate? It's a complicated picture, but fortunately friends, today I'm joined by Charles Roe. Charles is Director of Mortgages at UK Finance, the banking industry trade body. Charles, great to have you with me, thank you for coming in.

CR: My pleasure.

PS: Can we kick things off by talking a bit about all of the different factors that lenders use themselves to set their lending rates?

CR: Of course. When banks are setting their mortgage rate, there's a lot of things they look at. First of all, is it a fixed rate mortgage or is it a variable rate mortgage? If it's a variable rate mortgage or a mortgage that is related to the base rate where there's a tracker, the banks will price generally off the Bank of England base rate. But on top of that, they will put on a margin in terms of the cost of funds, how much is it they are going to pay to savers to get those funds. They'll also look at the type of mortgage, the loan to value. The higher the loan to value, generally speaking, the higher the mortgage rate, and that's to account for risk.

They will also have to look in terms of the creditworthiness of the borrowers. If you've got a good credit history, you'll get the best rate. If you've got slightly less good credit history, you'll get a higher rate. There's also competition in the market. Banks will want to maintain their market share depending on their strategic objectives to either reduce it or increase it. and then we mustn't forget that not all borrowers are able to maintain their mortgage payments. So, the banks will face some losses if they have to repossess a property and they may be facing losses there.

There are three or four things they will price into that mortgage product. When you look at fixed rate products, the overriding factor that goes in there is in terms of how much it costs the bank to get those fixed rate funds in the financial market. In terms of what are the future swap rates, so the likely expectation of future interest rates in two or five years’ time. On top of that, they will still have to add a little bit of profit for their marketing, their overhead costs, any losses that they may have, and consider things like loan-to-value, credit worthiness, just like they do on a variable rate mortgage.

PS: There are a lot of moving parts involved aren’t there?

CR: There's are a huge amount of moving parts involved and one of the biggest things that some banks will take into account is in terms of what is their funding model. So, are they using funds that come from savings accounts and deposits to help fund their mortgages or are they using them from the wholesale markets, so that’s other banks, building societies and financial institutions to lend.

Then the other big issue, and we’ve heard a little bit around this in the past in terms of when interest rates were going up on the mortgage side, is swap rates. Swap rates are what the financial money markets think future interest rates will be in two or five years’ time. So, they're forecasting what interest rates will be in the future and that is what, generally, influences the interest rate that is charged on the fixed rate mortgages that some homeowners generally take out for two, three or five-years.

PS: You mentioned lenders and their different models, do some lenders use a variety of different methods of accessing the finance?

CR: Yes, they do. Some banks and building societies will use members’ deposits and may offer a two-year fixed rate savings account. So, they will use some of that money to fund their two-year fixed rate mortgages.

PS: But they will also go out into the money market?

CR: Exactly. So, they will go out into the money market and say we want to borrow some money. We've got some short-term funds, so instant access, we want to make sure that we can lend that long-term, for example two or five years, and the money markets will give a price on an interest hedge for the bank or the building society to take that. Meaning they can lend that money which they've borrowed what we call short and lend it long.

PS: Is there a difference between the traditional building society model and the banks model of accessing their finance and lending?

CR: There's a small difference, not a huge difference. If you think of the banking model, large high street banks have a lot of current accounts, so they have a lot of what we call, non-interest bearing accounts which they can use and they're not having to pay interest on that. Whereas the building societies, all their accounts are savings accounts and they generally don't have a current account, they have deposit accounts which they are paying interest on. So, the cost of funding for building societies is marginally more expensive than it is for banks, as a general rule of thumb.

PS: It's kind of unsurprising that it takes a little while to get a mortgage isn’t it, there's a lot involved.

CR: There is a lot that goes in there but what we've found is that it's a robust way of doing things and the Bank of England seems to be happy with how the banks are doing this. The regulator is happy, in terms of the conduct regulator, and the FCA is comfortable with it as well. There is choice for all borrowers and that choice is a little bit more expensive than it used to be but that's a factor, or a result, of the increase in the Bank of England base rate.

PS: How do you explain that sometimes the gap between the base rate and the mortgage rates is bigger?

CR: If we talk about the difference between the Bank of England base rate and in terms of fixed rate mortgages, if we go back a year ago and what we see then is that the Bank of England base rate was just over 2% and a two-year fixed rate mortgage was priced at just over 6%. Meaning there was an interest differential there of about four percentage points. If we look at it today, I look at the Bank of England base rate and it's 5.25% and the two-year fixed rate mortgage is just under 6% at the moment. So now what we see is that the interest rates are much more aligned than they were 12 months ago. Now, the reason for that is because the Bank of England base rate has moved up to where the market expected the interest rate to be a year ago.

PS: So, they got it right.

CR: They got it right, they used their crystal balls.

PS: It's very complicated, but I guess we should be comforted that actually they've forecast it correctly and they've got it right.

CR: That's right. So, if we look at the future, we can see that the base rate is going to stay at around the level where it is at the moment, at least until 2025. That's what the forecasters are saying. This is what the economists at the Bank of England have been saying. They're calling it a Table Mountain approach, so flatter for longer rather than what we've seen before in terms of the Matterhorn approach, which is like peaks and troughs.

PS: Where do mortgage swaps fit into the picture?

CR: Mortgage swaps are really important in terms of giving certainty to lenders when they're lending money for two or five year periods at a time. Banks and building societies will take money on short-term notice from savers. So, they'll take that money into savings accounts, it could be an instant access account, it could be a six months’ notice account. However, because that is on a variable rate of interest and they want to lend to borrowers for two or five years at a fixed rate, what they need to do is be able to convert that variable rate of interest into a long-term fixed rate of interest to provide certainty to them and to their borrower. So, they go into the money market and they get a swap rate. Basically, you're swapping the interest rate that you are paying on the short-term deposits. In return, you get a fixed rate of interest for a longer-term and certainty there. And that's how fixed rate swaps are used to price fixed rate mortgages.

PS: Got it. I'm glad I had you in the room to answer that one because it's complicated, isn't it and, actually, the consumers don't need to understand the details. How has the way that banks set their mortgage lending rates changed? I mean if we go back to 2008, 2009, has it changed since that time?

CR: In terms of how the banks have set their mortgage rates, it has changed a little bit, not a huge amount. What we've seen since 2008, 2009 is that fixed rate mortgages have become much more popular. They're about 80% of the mortgage market now in terms of that's what homeowners want, that's what some borrowers want because it gives certainty for a period of time. But what has changed is the way banks stress affordability with borrowers. Prior to the financial crisis, you could self-certify how much you were earning, so there were no checks and balances to say, well, actually I'm earning £50,000 a year and the banks, the brokers took you on your word. Borrowers signed that this is what they earned.

Banks also want to make sure that when your fixed rate product has matured, for example in two years or maybe in five years, you can afford the mortgage rate that you might be moving onto in that two or five years’ time. Whereas before the financial crisis, that didn't happen and that's why there has been a lot in the press at the moment in terms of first-time buyers not being able to get onto the housing market, not because they don't have the deposit, but they can't get through the stress test.

PS: And does the stress test also manage to take into account things like inflation, cost of living, all of that?

CR: It doesn't. What it does do though is to take into account where the banks and the lenders think that the interest rates will be at a future date and they have to build in a lever for that, an additional amount. We've done a lot of work at UK Finance to see what interest rates that borrowers were stressed at over the last two years and what they are reverting to now.

So, if they took out a fixed rate mortgage two years ago, when you could get a fixed rate mortgage for two years at under 1%, and now you'd go onto a fixed rate mortgage for two years, it'd be about 6%. Our figures indicate that those customers and those borrowers two years ago would have been stressed at somewhere around six and a half, 7%. So, they’ve still got what we're calling wriggle room in their affordability.

PS: There's a lot of stuff in the news about people coming off their fixed rates and, you know, there's a bit of doom mongering going on, but actually you're saying they've been stressed and they passed the test and they'll be okay.

CR: I’m not saying they'll be okay. They passed the test when they took their mortgage out. As we all know, we spend up to our income. But for any borrower who is facing financial difficulty and is concerned about their mortgage, I would always encourage them to reach out to their lender. Speak to lenders early as they have teams of trained individuals who are experienced in helping people facing financial difficulties and they won't judge you. They won't give an opinion in terms of whether you've been foolhardy or what you've done is correct. They will work with you to find a solution. But the earlier you speak to them, the greater the number of solutions and options they have available in their toolkit that they can use.

PS: Good advice. So, brokers should get in contact with their clients and understand if they are facing difficulties, and the earlier they do that, the more help they can be.

CR: Very much so and, likewise, if you get that proactive call from your customer, the person that you arranged a mortgage for 18 months ago and they say I don't know what to do. I can't afford my mortgage. It's a little bit more than I expected in terms of I've now got larger energy bills, children are going to school. What do I do? Of course, speak to the mortgage broker but also point them in the direction of the lender. The lender can help.

PS: There are options.

CR: There are plenty of options out there, but as I said, do it early. Don't leave it to the last minute.

PS: Good advice. What else would you say that brokers should be watching out for going into 2024?

CR: We touched briefly on signs of distress, in terms of the borrowers that they've been working with. The other thing is, interest rates at the moment are not forecast to fall much before the end of next year, so 2024 but the mortgage market remains very competitive. We've seen over recent weeks that lenders have been cutting interest rates slowly by very small amounts, but they're cutting interest rates because they want to remain competitive. So, I think what we will see is that the banks will still want to maintain their market share. They will want to have competitive products out there.

PS: They’re in business to lend money, that's what they want to do.

CR: Exactly. But we won't see the rapid repricing that we saw when interest rates were going up earlier this year. I think products will be around for a little bit longer, but they will be coming down around the level they are. But, as the economists at the Bank of England have said, we are now facing a Table Mountain moment rather than the Matterhorn. So that analogy they're talking about, those interest rates won't be peaking and troughing as we've seen in the past. It'll be much flatter for longer.

PS: When there was all that repricing going on and products were being pulled left, right and center, I presume that was because of the uncertain time facing the banks, just as it was for the customers. So, they're not going to lend money unless they know what they're borrowing money on.

CR: Exactly, and this is what we were talking about in terms of the swap rates, how are swap rates priced and the long-term outlook for interest rates. So, if inflation is getting very high and the Monetary Policy Committee at the Bank of England has an objective to keep inflation at around 2%, the way they do that is by increasing interest rates. Because if they increase interest rates, the theory is that consumers have less money to spend because they're spending more money on their mortgages.

What we saw is when inflation was going up, as a result of what happened in the Russian invasion of Ukraine, interest rates were going up because of inflation going up and there we saw the banks having to reprice rapidly because they were reacting to what they were seeing in the hedge markets and the future markets for interest rate swaps.

In terms of that rapid repricing, one of the things that banks do realise and recognise is the importance of the broker community for them to be able to distribute their product. The last thing a bank wants to do is to go and alienate their broker network or hamper the relationships they've got. The banks, over the course of the earlier part of this year and this time last year, were immensely grateful for all of the work that the brokers across the UK did in trying to secure those right products for those borrowers that were facing increases in interest rates.

The banks recognise that the relationship they have with the brokers is a partnership. It can only operate and work if they're supporting each other. The banks don't want to pull mortgages at short notice. They don't want to alienate their distribution network. But at the same time, as we've talked about, they have to make a profit and they can't sell mortgages at a loss because the financial regulator then won't like that. They understand the challenge that this causes, but they want to work with brokers to make sure that they understand the issue.

PS: Got it. I think from the broker’s perspective, these are uncertain times and there are a lot of moving parts and, actually, this is when the borrowers need broking advice.

CR: Very much so and as interest rates start going up, and we've seen this in terms of borrowers coming off lower fixed rate products onto higher fixed rate products, it's how they make that transition and how the broker can help those customers find the best deal that's available for them. Now, it may be that that customer sticks with the existing mortgage lender because that's the best available product, the lender might have a follow on product. However, the broker still has a part to play to reach out to that borrower in plenty of time, before the fixed rate matures, and say this is what you need to look at.

PS: And the good brokers will know their clients. It’s a relationship, it's an ongoing relationship.

CR: It is and I'm pleased you've mentioned that because it brings me to a really important part of the FCA's regulatory remit, which is Consumer Duty. This has impacted all parts of the mortgage sector and the lending sector, in fact the whole financial services sector where there are retail customers over the course of the last year. And there, what we have to do in terms of making sure that our customers - whether they are the customers of the mortgage broker, whether they're customers of the bank - are getting good outcomes. It’s not a fair outcome anymore, it’s a good outcome. An outcome that is not going to create foreseeable harm for that borrower. So, the emphasis on the broker of working with the borrower and their customer is much more front and center in the process than it has been in the past.

PS: And rightly so too. Charles, thank you so much. That was Charles Roe, Director of Mortgages at UK Finance, the banking industry trade body. And just to point out, we recorded this episode on the 24th of October before the Autumn Statement and the latest Bank of England base rate decision.

The views expressed by external guests in this podcast are their opinions only and do not necessarily reflect the views of Barclays. Thanks for listening to Mortgage Insider. I'm Phil Spencer and this has been a Fresh Air production for Barclays. Please rate, review and follow the podcast on Apple, Spotify or wherever you get your podcasts.

What on earth is going on with the housing market?

Hi, Phil Spencer here, and this is Mortgage Insider from Barclays, the podcast series for mortgage brokers. I'm a property expert and sometime TV presenter, and I'll be using my experience to get to the heart of the biggest issues in the mortgage sector. I'll be joined along the way by industry leaders, brokers, and indeed Barclays own experts, who'll share their insight and expertise to help you navigate the challenges, changes, and opportunities in the world of property.

Well, I think it's fair to say that the UK's housing market remains in a state of flux. Interest rates are at their highest level for 15 years. House prices are going down, although, having said that, recent data from the ONS has found that they've actually gone up slightly in the 12 months to August. So, it's a mixed bag and I think it's pretty hard to see our way through at the moment. To help us put it all into perspective, I'm joined by Tom Bill, who is head of UK residential research at Knight Frank.

Tom, great to see you. As I said, the property market is always a complicated thing and there's always lots of variables and moving parts, but it feels at the moment that all the parts are moving and it's harder than ever. Is that fair enough?

TB: I think that is fair enough. There's a plethora of data out there from various different lenders and various different official sources. There's no one UK housing market that really sums up what the market overall is doing there. There are tens of thousands of housing markets across the country and the last 12 to 18 months in particular has been a pretty volatile time for anyone buying, selling or remortgaging. So, you've had a real mix of data and a fairly volatile economic backdrop.

PS: But, of course, people are trying to make these big decisions, financial decisions, emotional decisions. They haven't got all the information and it's frightening. Nobody likes making those big decisions in an uncertain way, but life goes on, doesn't it?

TB: That's absolutely true. For that reason, it's the uncertainty that tends to make people pull back, it’s not necessarily falling prices. No one wants to buy in a falling market but the uncertainty, I think, has made people pull back. I mean, if you rewind to last year, you had the mini budget, you had a great deal of volatility around what was happening in the mortgage market and we saw the market effectively close three months early for Christmas.

Back then, there was a relatively quick fix. The government changed leader, mortgage rates came down and the market in the first half of this year picked up to some degree. There was a bit of a relief rally around what was happening and mortgage rates were coming back down again. Where we are now, in the final three or four months of this year, is a market that's probably a little bit more subdued than people are used to. There hasn't really been an autumn market to speak of, and I think the simple reason for that is the fact that inflation has been stubbornly high over the summer. The Bank of England's making all sorts of noises about rates staying higher for longer and that feel good factor that sentiment, which is a key lubricant in the housing market, isn't really there yet.

PS: You mentioned that we don't have one housing market, we have lots of them. I wanted to ask you about how polarised the whole market is because it is a very regional picture. Can you talk through about how that looks in the North, South or London or international or prime or mainstream?

TB: Of course I'll do my best. I think, generally speaking, in the South of England we're seeing stronger price falls. So, the South West of the country is probably coming down from the highs of the pandemic when everybody was looking for more space and more greenery. London and the South East still has some affordability issues. We talked a lot about affordability before the pandemic, where we saw people leaving the capital to go and get more bang for their buck, something I'm sure something you're very familiar with. I think that trend is probably picking back up again as the work life balance adjusts. People are looking in perhaps formerly overlooked residential districts, perhaps areas that aren't a ten minute walk from the train station. And so, in London, there's a bit more of an affordability squeeze and, as a result, I think prices are under more pressure.

PS: And outside of London, are you still seeing that race for space and new areas popping up and people looking for better value farther away. Is that still happening?

TB: We are a bit, although it has calmed right down from when people were looking for the picture postcard locations in the summer of 2020. It's probably now blurring more into some people who are looking to strike the right balance between the office and their home. People are buying perhaps in the country and retaining a place to rent in London and more widely across the rest of the country it’s an interesting one.

Let's rewind to the global financial crisis. London did very well in the aftermath of the global financial crisis, pulled away if you like from the rest of the country. What's tending to happen now is that we're seeing stronger price growth in Northern areas, they're not catching London up, but they are probably declining by less and I think that probably paints the regional picture. Of course, within that you have neighbourhoods, roads, the right side of the road, the wrong side of the road and all those individual markets that I’m sure you're very familiar with.

PS: Let's just do a bit of a look back over the last year. We have had high inflation. We've had all these interest rate rises, how are those impacting the market right now at the back end of the year?

TB: What we're seeing at the moment, if you're looking at transaction volumes, you've got a market that's probably around a fifth below its capacity in terms of the mortgage approvals that are coming through, in terms of pure transaction numbers.

PS: That's in terms of what you would normally expect to see at this time of year?

TB: Yes. So, if you take the five-year average, I'd say the market is operating about a fifth below its capacity. Prices haven’t been affected in the same way; the numbers aren't as big. Probably for the fairly simple reason that supply and demand have both come off a little bit. For big price falls you need to see waves of for-selling like we saw in the aftermath of the financial crisis where lenders were in a different position, a much stronger position.

Today, if you look at the numbers of arrears and the repossessions, they're all still very low by historical standards and so prices are coming off - pick your index - anything between 1 and 6% at the moment.  We are forecasting around a 7% decline across the UK this year.

PS: Okay, and that's a calendar year?

TB: Yes, across 2023 some markets will do better than others and London is actually one of them. I mentioned the affordability squeeze, but there are some areas that are actually doing okay. Some of the more prime areas, for example, where prices didn’t take off in the way that they did in the country house market during the pandemic. So, there’s still a relative value argument, I think, in prime areas of London that's keeping that market ticking over at the moment.

PS: Would I be right to presume that's because the very high end of the London market is driven by international money and buying in England at the moment actually looks quite cheap for some people?

TB: That's a big driver. During the pandemic, we all remember that international travel wasn't really happening. Flats in particular fell out of favour. Areas like Knightsbridge, for example, which were pretty subdued for two or three years are actually now coming back and we saw price growth over the last 12 months which was very minimal but growth nonetheless.

PS: I read something recently and I wonder if you’ve got any thoughts on this. The values of flats were very different to what the values of houses have done right across the country. Have you seen any of that?

TB: I think what we saw, generally speaking, is that houses did very well during the pandemic and thereafter but I think that's swung back and there's now much less of a differential. It's still there to some degree, but I think people are now much more willing to look at apartments and flats. It's been a while since the last lockdown and so I think people are just a bit more agnostic now.

PS: Linked to the regional differences across the UK, can we focus on buy-to-let and how that whole market is faring at the moment?

TB: Rents are rising very strongly due to a lack of supply for all sorts of reasons. So, on paper you're looking at good yields if you're a landlord. Rental value growth is going to stay strong, we think, for the foreseeable future but at the same time buy-to-let mortgage rates have gone up alongside other mortgage rates. In addition, generally speaking, there’s been more tax and red tape over the last ten years and we’ve seen a number of landlords leaving the sector, and that probably accelerated during the pandemic.

So, when we had the stamp duty holiday that was seen as an opportunity to dispose of the property and I think the result was an imbalance between supply and demand to push rents up. On paper, I think landlords are looking at attractive numbers in terms of yields and rental value growth but in practice it's become a much more hostile environment for landlords over the last ten years.

PS: I worry because it is quite a hostile environment for landlords and if landlords aren't motivated to remain being landlords, then this supply and demand imbalance will get worse. In which case rents will carry on rising.

TB: I think we're coming down from the crazy highs that we saw during the pandemic in Central London, for example, saw a 20% plus rise over a 12 month period. I think rents will still rise, but the imbalance in a tough sales market and many first-time buyers looking at mortgage rates being quite high, looking at the rental option, demand feels like it's not really going to go away any time soon and there's nothing really happening in terms of the news flow.

There is the renters reform bill going through parliament at the moment but there's nothing happening around the sort of sentiment that landlords may be feeling that is going to tip the balance noticeably. Things will calm down from the highs of the pandemic, but we're not going to see the market turn on its head.  

PS: It’s certainly one to watch. How about new build? How does that fit into the picture?

TB: There's a lot being written and said about new build at the moment.

PS: Is anything actually being done?

TB: That's the hard part and the reason is that, for the large part, volume plc house builders are delivering the houses for the country. What’s sometimes overlooked is that housebuilders and developers will build and deliver properties at prices that are set by the second-hand market and those delivery rates depend on what's happening in the wider economy.

The new build market functions according to an economic cycle, not a political one. I think this factor is also sometimes overlooked in terms of how easy it is to bandy around numbers and to make those numbers become a reality. But I think that economic cycle is something to be to be borne in mind.

PS: Of course, we will be having a general election in the not too distant future, is that going to change things because housing is a bit politicised?

TB: It has become politicised. I think inflation will keep calming down, I think that's just a mathematical inevitability. But annoyingly, by the time the economy probably does start to feel a bit more stable, yes, we will have a general election and the housing market doesn't tend to like general elections. So next year I think we'll probably be looking more closely at what's happening in the political realm than the economic realm, which is something we've been focused on this year.

PS: Okay, thank you Tom. Just a couple of other points if I can, there's a lot being made about people finishing up on their fixed rates and the impact that will have. And I read something recently about mortgage swaps, which I wasn't familiar with. Can you just talk a little bit about both those topics? Will the number of people coming off their fixed rates now, or in the next couple of months, make a big impact?

TB: In recent years, 90% of borrowers are on fixed rate deals compared to two-thirds if you go back to 2008/09, and the prevalence of fixed rate deals prevents a cliff edge moment for the market. Everyone isn’t rising and falling at the same time depending on what interest rates are doing, so people have been rolling off these fixed rate deals and that has provided a degree of insulation.

I'm not looking forward to February 2025 personally as that's when I come off my deal but what we will have is people gradually coming to the end of their terms. At the moment, the average mortgage rate being paid is still not some of the scary numbers that we're hearing in terms of 5%, 6% or even 7%. The average is much lower because many people are still on fixed rate deals.

PS: Can I put you on the spot? If you look into history, what is the average interest rate? My gut feel says it's about where we are.

TB: I think you're probably right. If you look back, the last 14 years have been the exception.

PS: Completely and we've just got rather accustomed to this and think money's cheap when, actually, it's not what.

TB: People have been talking about the new normal for interest rates. Anybody who's over 35, it looks like the old normal, which is when rates were currently where they are now. So, yes, it's been a period where, if you were clever, you would have borrowed to do the loft or build as extension.

We’re coming back to this new norm and the key for the housing market next year is people coming to terms with the fact that this is now the new norm and rates aren't going to come down. So, once the volatility in the mortgage market has died down, which it feels like it is. Once it feels like inflation has been tamed, which I think should be perhaps early next year, then the key will be sentiment and that's when people will look around and think, well, actually this is what the market is now, time to get on with it. The spring market next year will be one to watch.

PS: Really, really wise words. Tom, can you try to explain in layman's terms - and I appreciate it's very complex - but what are interest rate swaps and how do they affect brokers and the money markets?

TB: Sure. I mean, the swap market itself is what's happening in the background to the mortgage market. Interest rate swaps are when investors have an income stream and the income stream may be floating and they want to swap it for a fixed income stream so they have certainty of what is coming through. Essentially, the swap rate is what financial markets will price interest rates at over a certain period. So, over a five year swap, for example, will be what the financial markets think the interest rate is going to do over a five-year period. It's a complex subject.

It's essentially what financial markets think interest rates are going to do over a two-year or a five-year or ten-year period. It allows investors to have certainty on return of their investments and it allows mortgage lenders to go and borrow money at a fixed rate, which allows them to provide fixed rate mortgages to their consumer.

PS: Well, I'm glad you cleared that up for us. Thank you, Tom. How should brokers support their customers at the back end of this year and what should they be keeping an eye on, would you say?

TB: I think one thing that we've kept quite a close eye on throughout this year and probably extends to everybody who's interested in the housing market is what's driving high inflation. Which is, in turn, driving these high mortgage rates. A lot of it has been what's happening in the labour market. So ordinarily, a strong labour market is good for the housing market because people have more money to spend. But actually, what we've seen is that strong wage growth has been driving core inflation – the underlying inflation figure - which is what the Bank of England is particularly worried about and that's why rates have kept as high as they have done.

So, signs that the labour market is beginning to cool down is probably something worth watching. Wage growth calming down. If those sorts of indicators start to move positive then that's a good sign that the Bank of England will probably feel more relaxed about what happens to rates.

PS: Have you any idea what the data on Labour is showing us at the moment?

TB: At the moment, we're seeing that wage growth is still quite strong. It's starting with a six, it’s now finally outpacing inflation, which is something it didn't do for a long time. People might start to feel that a little bit in their pocket, but the main point is that it's coming down, but coming down very slowly.

Every month, people are on the edge of their seat waiting to see what the wage growth is going to be, what core inflation is going to be and, over the last three or four months, it's tended to be either flat or just come down by a very small amount. So, there's that feeling that it's coming down, but just sort of painfully slowly and it'll take a while for it to come through.

PS: Tom, great to see you and thank you so much.

That was Tom Bill, head of UK residential research at Knight Frank and just to point out, we recorded this episode on the 24th of October before the Autumn Statement and the latest Bank of England base rate decision.

The views expressed by external guests in this podcast are their opinions only and do not necessarily reflect the views of Barclays. Thanks for listening to Mortgage Insider. I'm Phil Spencer and this has been a Fresh Air production for Barclays. Please rate, review and follow the podcast on Apple, Spotify or wherever you get your podcasts. 

The Marathon Mortgage – here to stay or a passing phase?

Hi, Phil Spencer here and this is Mortgage Insider from Barclays, the podcast series for mortgage brokers. I'm a property expert and sometime TV presenter, I'll be using my experience to get to the heart of the biggest issues in the mortgage sector. I'll be joined along the way by industry leaders, brokers, and indeed Barclays own experts, who'll share their insight and expertise to help you navigate the challenges, changes, and opportunities in the world of property.

Whilst the price of property in the UK may be going down slightly, the cost of buying a home is still hugely expensive for many, particularly when the cost of renting and the cost of living remain so high. Coupled, of course, with higher interest rates for borrowers. To cater for the ever-increasing challenge of getting on the property ladder, there's growing demand nowadays for long-term or marathon mortgages, even up to 40 years. In fact, recent data from the mortgage technology platform Twenty7tec showed that more than half of all searches made by brokers on its site were for mortgages with a term of more than 30 years

So, what do mortgage brokers need to know about the situation? To find out, I'm joined today by James Tucker, CEO of Twenty7tec and also by Lewis Shaw, founder of Shaw Financial Services, an independent broker based in Mansfield who has a large focus on the first-time buyer segment of the market.

Marathon mortgages is a really interesting topic and it does seem to be generating a lot of interest in the press. James, perhaps we can kick off with you. Can you talk us through what you've seen happening on Twenty7tec when it comes to searches for these long-term mortgages?

JT: To give a little bit of context, we have 15,500 mortgage brokers across the UK that use our platform on a daily basis to find mortgages for their clients. That equates to about 1.5 million searches every month and there's a couple of key points that we've seen occurring, particularly over the last 12 months.

Firstly, and I'm sure Lewis is probably younger than I was, but when I got my first mortgage, a 25-year term was pretty standard at that point. Anything more than that was considered fairly long. We're now at a point where over 70% of mortgages are in excess of 25 years as term. So, we've seen that move already, in the mid-market if you like, in terms of duration of mortgage.

In particular, over the last month, we've seen a really big shift towards what you've termed, quite rightly, as marathon mortgages. So, terms of 40 years, especially in the remortgage market where searches for mortgage terms of more than 40 years have risen 54% in the last year. It’s a huge number and it has a very big consequence for the consumer taking out that mortgage and what that means from a cost perspective, which I know we’ll talk about in a little bit.

It has also seen the same impact in the first-time buyer market. For first time buyers, we've seen searches for terms of 40 years rise by 44% in the last year as well, so that move towards marathon mortgages has been a very significant one, particularly as interest rates have risen in the last 12 months.

PS: I guess this is due to interest rates, cost of living and also cost of rent, particularly for first-time buyers who have been struggling to save up for the deposit and the cost of housing. So, it's all kind of pushing towards that. Would I be right in thinking, either of you, that these longer-term mortgages are much more common in other parts of the world?

JT: Yes, I think you're right. Across Europe and the US, longer-term mortgages are far more common than they are here in the UK. But you've also got a different funding set up for the way mortgages are funded in those countries, meaning the interest rate environment is somewhat different to what it is here.

PS: Lewis, are you seeing a big take-up and in any particular sort of sector of the market?

LS: We've definitely seen an increase in longer-term mortgages specifically from first-time buyers, however not exclusively. The interest rate environment is much higher than we've seen for a long time and, as such, in order to borrow the amount that people need to borrow to buy the house they want, then the only way of making that affordable is to extend the term of that mortgage. However, we're also seeing people that are remortgaging extend the terms of their loans in order to get themselves over the hump of this higher interest rate environment, with the hope that they will come down in the future.

PS: Would you say, in general, people are coming to you asking about longer-term mortgages or that they're wanting a loan and you're coming up with this as an option to enable them to borrow more money?

LS: So, what often happens for first-time buyers is that they typically start their journey online and most online platforms will almost always be set to a 25-year term as a base. So, they tend to turn up with the idea of 25 years. Then when we actually get into the nitty gritty of how much this is going to cost, how much they can actually afford, then we open the door to them being aware that they can extend the term of the loan beyond 25 years, potentially up to 40 years with many lenders. That can then open up a different budget for them in order to buy a better house or to buy the house that they want but in a more affordable way. Albeit, of course, the longer the loan, the more interest they pay. So, there's no magic bullet, but it's certainly the only option for many people in order to get on with their lives.

PS: This being creative, isn't it? I mean, the banks want to lend money. They're in business to lend money, and I guess they are having to be creative because people are a little bit on the fence. They're a little bit concerned about things. Let's chat a bit about what factors the lenders themselves are going to look at. I presume age is the obvious one, but what else are they considering when somebody submits an application for a marathon mortgage.

LS: Age is the main driver. Are you going to be able to repay this loan at that age. For example, if someone's 35 and they want to take out a 40-year mortgage, depending on their occupation, is it feasible that you're going to be able to pay that at that point in time? We're working here on earned income. So, if they've got significant pension payments due when they retire. For example, if they're public sector workers, there may be a case that we can use the pension income. However, often it's about whether your occupation is suited to working beyond retirement age, which these longer-term mortgages often take people beyond.

Of course, if someone works in, for example, cyber security and they're working from home on a laptop, then of course it may be feasible to continue working to 70, maybe 75. But if you're a manual worker such as a scaffolder, a hod carrier, a ground worker etc, it's unlikely that they are going to be able to continue doing that job at 65 plus. I mean, it's a physical job, so there has to be an element of feasibility regarding your occupation, or there has to be enough pension income that we can assume will be available to service that debt.

JT: Again, if you go back ten years, the majority of lenders would have had a maximum age of around 65 that they would lend to. As Lewis noted, that's something which has changed even amongst the high street lenders who have been pushing out to 70, even 75 now. Clearly age, as we said, is a key factor in determining the extent to which a longer-term mortgage is going to be appropriate. And again, as Lewis rightly says, occupation is probably the other key factor that we also see in the system that determines the extent to which that is going to be the right solution for the client and ultimately whether the lender is likely to be prepared to lend or not.

PS: If you had a 25 year old sat in front of you, would you have any concerns or reservations about recommending a 30 or 35 year mortgage?

JT: I'll give you some statistics quickly and then defer to Lewis from an adviser perspective. If you were sat in front of a customer today and they were saying to you that they were keen on, let's say, a product which was a five-year fixed rate at 4.5%, and they were looking at that product over both 30 years and 40 years. Over 30 years, the true cost of that product right now would be £381,000. Over 40 years, the true cost of that product would be £497,000. So, it’s a big, big difference that I think doesn't preclude the 40-year product being the right answer but it is important that the customer understands the difference between the two. And that's where an advisory role is so important.

PS: Lewis, any thoughts from you on that one?

LS: James is absolutely spot on here in terms of the extension, albeit only by a few years in comparison to the overall term, the dramatic effect it has on the amount of interest that you'll pay is significant. Of course, that's money you've got to earn, that's money that is basically going in interest. So, it can be attractive for borrowers to see these lower monthly payments. Which is fine as long as they are aware that, for example, as they go through their career, if they have a pay rise, if they have a promotion, they need to allocate that additional capital to paying off the mortgage to bring those interest costs down. Because what we have a tendency to do, as humans, is not think about the future very well.

So, it's important that advisers really hammer home how much of a disadvantage a longer-term may be in terms of the interest. Now, if that's the mechanism that gets you on the property ladder then great because, you know, effectively if you're renting you might as well be paying 100% interest rate. You've got no assets at the end of it.

PS: Yes. Nicely put.

LS: It's much better to pay that interest than not have a home, but there has to be a serious conversation around - okay, look, we can do this but you have to have a plan in order to clear this off sooner, if you can.

PS: So, it's a useful thing to have up your sleeve in order to help somebody get onto the ladder, but it is then very much up to them to have control of it. It does occur to me that if people are increasing their debt simply because there's more credit available that will put upward pressure on house prices.

JT: Yeah, I think you're absolutely right. I think under a normal environment that you would have seen historically with the interest rate rises that have occurred over the last year, you would have typically seen house prices fall by somewhere between 5 and 10% depending on geographically where you're looking at that. That doesn't seem to be the case and I do think one of the things that is propping up the housing market, to an extent, is the fact that people are able to borrow on a longer duration and therefore still able to afford the property prices that we see across the UK today.

PS: Are there risks for borrowers of offering these longer-term deals, what are they taking into account?

LS: When lenders originate the loan, potentially, that loan will stay on their books for much longer and therefore as the years increase, the likelihood of delinquency increases, meaning there is a higher risk for lenders. So, when we're looking at submitting a mortgage application, of course there are credit checks, everyone's aware of that. As I'm aware, many lenders do have a mechanism for allocating a certain amount of points for their scorecard dependent upon the term. The shorter the term, the lower the score card, generally. So, there are risks for lenders but, of course, it's not just that the loan may fall into delinquency, it's also what happens if something happens to that person.

40 years is the best part of most people's working lives. If you took out a 40-year mortgage at 25, that takes you to 65 and an awful lot will happen in life. Again, as humans, we're not particularly great at looking into the future. If I look back between 18 and 30, all manner of things happened. It's about lenders being comfortable with it, but also borrowers ensuring that they're adequately focused on the reality of it, that life will throw up curveballs that no one expects. So, there is a risk from a lender’s point of view, but I think the bigger risk is from a borrower's point of view.

PS: So, it's really up to the advisers, the brokers themselves to work very closely with their clients and understand their clients hopes, dreams, ambitions and to explain the risks.

JT: Yes, and I think that's where Lewis's role is so important in all of this and why it is so important for customers, particularly at the moment, to seek the advice of a really qualified and really experienced adviser who can help them understand all the different options available to them and then ultimately help them come to the right decision for them.

PS: Is there anything you'd say that brokers should be particularly mindful of this year because it's a changing world out there. Things in your world, the finance world, change rapidly, it seems.

LS: I think we've seen a big change post-Covid. So, if we can go back pre-Covid times, generally, you'd see a client, they'd tell you the circumstances, you recommend the mortgage and you tended not to get bogged down in speculation about interest rates because it was more based around if they were planning on being here long-term? Yes, okay then, let’s look at these particular types of products. Have you got any plans to move in the short term? We might have, okay, then let’s consider a shorter-term product etc.

However, since Covid and the dramatic rise in interest rates, there's been a tendency for clients to want brokers to effectively tell them what's going to happen with interest rates. For many brokers, it's very easy to fall into that trap of almost acting like an economist in predicting what may or may not happen and I think we have to be careful because, of course, we can't predict what will happen with interest rates.

I mean, no one predicted the war in Ukraine, no one predicted Covid and no one predicted the inflationary challenges that we have seen and the extent to which they will have an impact on households, specifically with mortgages. So, I think the big thing for brokers throughout this year has got to be to get back to dealing with circumstance, rather than speculation about finance.

JT: I think Lewis is absolutely spot on there. There's certainly been a push from the press and also from the public to ask the mortgage industry to predict interest rate movements and that's absolutely not something that we can be a part of. What we can do, all of us, is help consumers determine the right course of action for them, subject to the circumstances that they face themselves, the property they wish to buy or the property they're looking to remortgage.

PS: James, are you expecting marathon mortgages to be a trend that continues? Do you think it's here for the long term? Is it a kind of passing ship?

JT: I think our sense, and again without wanting to predict the interest rate environment, would be that in an environment where interest rates continue to decline somewhat, and that may be the case, that should enable a little bit more flex from a lender's perspective in terms of affordability and also from the customer perspective as well over a shorter time horizon. So, we may be at the peak now in terms of demand for longer-term mortgages. Um, but that clearly is subject to house prices as well.

PS: Lewis, just finally from you, any particular examples you could throw in our direction in terms of first-time buyers taking out these marathon mortgages?

LS: I did a case a couple of weeks back where a young couple came to me at the start of their careers, they'd been gifted some capital by his parents and they wanted to buy a particular house that seemed the right house for them. They weren't aware of how much they could borrow, so the initial stage was very much, well, look, you can buy that house but the reality is that, in order to get the borrowing, you're going to require, the mortgage term is going to have to be 35 years. There's no way around that. Initially it started off with parents being involved saying, oh, well, we took out a mortgage for 25 years and I said, look, they can take our mortgage for 25 years but you’re going to need to put your hand in your pocket a bit more in order to do that. They weren't particularly keen on that, so I informed them that the only option is to take this mortgage over 35 years. Thankfully, that mortgage is now offered.

.PS: How old were the first-time buyers?

LS: They were in their early 20s, which is an incredible position to be in at such a young age, to be able to get onto the property ladder when we've seen the age of first-time buyers keeps rising. So, that was the mechanism by which we helped get them onto the property ladder. Again, that revolved around the conversation that you are at the start of your careers, as your wage increases and when you come back to remortgage in five years’ time you've going to have higher incomes and I'm going to be reducing that term even further. So, even if interest rates reduce, don't expect your mortgage payment to reduce because I'm going to take more of your income to pay this off sooner.

PS: So, yet again there's an example of this being a really useful product to help people get on the ladder, but they must manage it with the help of their broker.

LS: That's true and I think it's also mindful that because the hardest hurdle for most first-time buyers to jump over is the deposit – which is taking longer to save with rents and livings costs rising. So, of course, the average age of the first-time buyer keeps increasing, and there is a finite amount of time we've got on this earth and to be able to work. Therefore, it’s unsurprising that we're seeing longer-term mortgages, and certainly past state retirement ages, because unless we do something to be able to bring that average age down, this is going to be a necessity.

PS: James, Twenty7tec is one of the leading technology platforms, what do you think the future holds for mortgage brokers?

JT: What we're seeing in the market now is an increasing need for advisers and customers to engage with each other on a more frequent basis. The relationship is shifting from, can you do my mortgage every two years or five years to, actually, can you provide me with an ongoing level of service and an ongoing level of advice to help ensure that I am on the right mortgage product on a regular basis, and the circumstances that I'm facing in my life are ensuring that I'm making the right financial decisions. So, I think we will see technology continue to develop in a way that helps advisers stay in contact with those customers more frequently and provide them with more useful information that is pertinent to their circumstances and enable them to take actions when necessary.

PS: So, actually, it's good news for everyone. It means the brokers have to work a bit harder but then they've got some tech to help them.

JS: Completely, and I think they build much stronger relationships with those customers when they're in more regular contact.

PS: And with consumer duty, that is par for the course, that needs to happen.

JS: There's no question that this is something the regulator is pushing really hard, and for good reason.

PS: Wise words indeed. That was James Tucker of Twenty7tec and Lewis Shaw of Shaw Financial Services. And just to point out, we recorded this episode on the 22nd of November.

The views expressed by external guests in this podcast are their opinions only, and do not necessarily reflect the views of Barclays. Thanks for listening to Mortgage Insider. I'm Phil Spencer and this has been a Fresh Air production for Barclays. Please rate, review and follow the podcast on Apple, Spotify or wherever you get your podcasts.