Question: what links American beer drinkers to a speech made to a room of accountants in London?

Answer: they both moved the UK swap market in early October, with subsequent impacts on mortgage rates.

In the US, much hotter employment data than expected — with ‘Food Services and Drinking Places’ leading the charge with 70,000 new jobs in September — moved markets on both sides of the Atlantic.

The inference was that US policymakers need not be in such a rush to throw their economy a lifeline by cutting rates at pace.

Neither lender nor broker can solve these gaps alone

On the same day, a speech by Bank of England chief economist Huw Pill suggested the Bank might be more cautious in cutting rates than the markets had priced in.

The combined impact was a considerable 0.2% rise in sterling swap rates — the biggest daily surge in nine months.

Swap rates represent the market’s best guess of where the base rate will move over the coming months and years. They are critical to mortgage pricing because lenders need to factor in how their funding costs will change over the life of a product. Where base rate sits today is only half the story.

It was unsurprising, then, that many lenders increased mortgage rates within a couple of weeks of the US jobs news and Pill’s speech. And, while 0.2% may not sound like much, it equates to about a £300 rise in annual repayments on a typical 30-year mortgage.

Context matters

But context is everything, and early October jitters followed four months of persistent rate reductions in the swap, and mortgage, markets. In fact, the two-year swap fell by almost 1% over the summer, with much of this decline being passed through to borrowers — about a £1,500 reduction in annual repayments.

There’s an area in which we can help each other — sharing insight on under-served customer segments and co-creating innovative solutions

Indeed, there are plenty of reasons for optimism. The number of mortgage illustrations generated by brokers — a good leading indicator of market activity —increased for the third consecutive month in September, up by a quarter compared to a quiet June.

And, a couple of weeks after Pill’s speech, UK inflation undershot expectations, dipping below the Bank’s 2% target for the first time in three years. Markets now expect several cuts to the base rate over the next year, which will help make homebuying more affordable.

But staying ahead of the money markets has been a fool’s game this year, and there’s plenty more uncertainty to come. Several events could change the course of mortgage rates, whether the market reaction to the Autumn Statement, the small matter of the US presidential election or, sadly, ongoing conflict in the Middle East, which impacts oil prices and, therefore, inflation.

Our research suggests that a raft of demographics remain under-served

With all these moving parts, it’s more important than ever that mortgage product and pricing folk look up from their spreadsheets and engage with sales colleagues and brokers to navigate the market together.

The benefits to us of speaking to brokers can’t be overstated: it injects a dose of reality and pragmatism to complement the numbers we sometimes obsess over. And brokers tell me they like speaking to the decision makers, from a product and pricing perspective. So, where are the opportunities for us to work together more closely?

First, it’s critical that those of us charged with product and pricing source insight from brokers and marry this with our numbers, which often tell us ‘the what’ but rarely ‘the why’. For example, I can easily observe that residential searches continue to rise, but only brokers can add the colour — the kinds of clients they’re talking to, their aspirations and their concerns.

In return, we product folk can do more to share our view of the market — how macroeconomic trends are impacting products and pricing, the outlook for the market, and the assumptions and dependencies on which this is based.

With all these moving parts, it’s more important than ever that product and pricing folk engage with sales colleagues and brokers to navigate the market together

There’s then an area in which we can help each other — sharing insight on under-served customer segments and co-creating innovative solutions to meet their needs. Our research suggests that a raft of demographics remain under-served, with a range of potential solutions, from alternative data sources to more innovative product types to risk-based pricing.

It is plain that neither lender nor broker can solve these gaps alone, but together we have a fighting chance.

Let’s continue to navigate the choppy seas together.

Alex Beighton is head of mortgage products, pricing and analytics at Nottingham Building Society

This article featured in the November 2024 edition of Mortgage Strategy.

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