It has been intense week for financial markets and financial services. Arguably the mortgage market witnessed the greatest pressure with big ructions in swap markets which meant that mortgage rates were withdrawn and increased.
Brokers have been working very long days while the regulator is reportedly in touch with lenders to discuss the sudden withdrawal of mortgages as the Financial Times reported.
There is a warning in FTAdviser from PFEP Wealth Management’s Richard Bishop after this week’s events. “With little thought on future cash flows to cover mortgage payments, there is a good percentage of borrowers who have simply kicked the can down the road this week.”
“They seem to think securing a rate is the only metric. No thought is being given to affordability in the future…The mortgage market is in panic mode this week.”
After such a week, it is interesting to hear what the mortgage industry itself is asking for and an analysis is provided by Mortgage Solutions here.
This is not, for example, a glowing review of the Government
Samuel Mather-Holgate, independent financial advisor at Mather and Murray Financial said: “Ignoring the IMF, sacking the boss at the Treasury and doing no interviews after the Budget [were all wrong]. Nobody knows what this Government will do next, but I don’t think it will be good.”
This is another.
Mike Staton, director at Staton Mortgages said: “There are two options basically. The first is to keep increasing interest rates until we hit the target inflation of two per cent, but, I feel, this will be at the detriment of homeowners who are already at tipping point with household bills costing more than ever before. Can we afford to let people lose their home? Or a house price crash?”
The other area that felt pain was defined benefit pensions. Although there were some extraordinary headlines from the national media, it was a little more complicated than was reported.
We know the Bank of England intervened to support gilt markets at least partially because some DB schemes faced significant margin calls as a result of some Liability Driven Investment structures – often an important interest rate hedge, but grim when it requires gilt sales in a plummeting market.
The central bank said it would carry out temporary purchases of long-dated UK government bonds in order to "restore orderly market conditions", as Investment Week reported - adding the purchases would be carried out on "whatever scale is necessary to effect this outcome".
The BoE said it would target conventional gilts with a residual maturity of more than 20 years in the secondary market, initially at a rate of up to £5bn per auction but in an intervention potentially totalling £65 billion as Reuters reported.
The pension press reports that trustees have been urged to act to address the issue swiftly while the Bank of England support continues till mid-October.
Mercer partner and investment consultant, James Brundrett, urged trustees to “please take action now”, warning that waiting to be "too precise" could be the enemy.
“Don’t leave it a couple weeks, you have to do something now and make decisions, so speak to your advisers.
“You just need to make some decisions that at least go in the right direction, as that collateral position really needs to be bolstered up for the 14 October, when the Bank pulls out its support of the market.
“We need to be in a position now where these schemes can really weather a significant rise in yields, where it might be double what was expected before.”
Broadstone’s David Brooks writing in Pensions Expert recounts seven rather interesting days in pensions.
As he notes: “A switching on, albeit temporarily, of the quantitative easing tap got things moving again. This had an almost immediate effect of clearing the blockage, with yields dropping to 4.2 per cent. There was a lot of work to do to ensure schemes could move funds to hold or improve their hedged positions. But at least the plumbing was now back working.”
It is not all bad news. Writing in Money Marketing, retirement expert Billy Burrows notes that it is a very interesting time for annuity rates asking how high will they go and adding: “From 1 September 2021 to 1 September 2022 annuity rates have jumped by nearly 50%. During this period, the benchmark annuity (£100,000 annuity, 23rds joint life with level payments for ages 65 and 60) rose from about £4,000 per annum to £5,795. That is nearly £1,800 per annum gross which is a 45% increase. Twelve months ago, the benchmark gilt yield was around 1%, today (26 September 2022) it is 4%.”
Harlequin Resorts chairman David Ames has been jailed for 12 years for a £226m fraud at Southwark Crown Court following an investigation by the Serious Fraud Office.
David Ames fraudulently abused his position as head of the business and exposed 8,000 investors to huge losses.
In breaking news, on Monday morning the Government has abandoned plans to scrap the top rate of tax set at 45 per cent. An important climbdown as it faced a Parliamentary rebellion among Conservative MPs but will it satisfy markets long term?