Introduction

Shikha Gupta, Portfolio Manager at Astra Asset Management, shares her insights on the UK mortgage market. In this article, we delve into Shikha’s perspective on the advantages of refinancing into fixed-rate mortgages with a five year term, particularly for pre-2010 borrowers with variable rate mortgages.

Astra Asset Management, founded by Anish Mathur in 2012, is an investment management firm specializing in a wide range of financial products, including mortgage-backed securities. With a decade long track record and extensive expertise in the UK residential mortgage-backed securities market, Astra Asset Management has established itself as a trusted partner for investors seeking exposure to the UK mortgage sector in particular.

The Advantage for securitisations backed by Pre-2010 Mortgage Borrowers

Pre-2010 mortgage borrowers hold a distinct advantage due to significant property price appreciation, resulting in reduced Loan to Value (LTV) ratios. Shikha Gupta, an expert in mortgage-backed securities at Astra Asset Management, has identified this advantage and emphasizes that these borrowers have the opportunity to have their properties revalued for their loan to drop below the 60% LTV threshold, making them eligible for 5-year fixed-rate mortgages at attractive levels.

By taking advantage of this opportunity, pre-2010 borrowers can secure fixed-rate mortgages at approximately 4 %, often lower than the variable rates they are currently paying. According to Astra Asset Management’s Shikha Gupta, the interest rate differential alone makes refinancing an enticing option for these borrowers.

Protection against House Price Depreciation

A low Loan to Value (LTV) ratio ensures that borrowers have a significant equity cushion in their properties, reducing the risk of negative equity in the event of a housing market downturn.

Ms Gupta points out that from an investor’s perspective low LTV ratios provide a level of security for mortgage-backed securities. When borrowers have a substantial equity stake in their properties, they are more likely to prioritize mortgage payments and meet their financial obligations. This reduces the risk of default and foreclosure, ultimately safeguarding the value of mortgage-backed securities held by investors.

Advantages of Fixing for 5 Years

Shikha, a well-respected Portfolio Manager at Astra Asset Management since 2017, outlines several advantages for borrowers who choose to refinance into fixed-rate mortgages with a five-year term:

1. Significant Interest Savings: Refinancing into a fixed-rate mortgage at, say, 4% enables borrowers to make considerable savings on interest payments compared to their current higher variable rates (around 2% over benchmark). Highlighted by Shikha Gupta of Astra Asset Management; an interest rate differential of around 2% can translate into substantial long-term savings over the term of the mortgage.
2. Financial certainty: Fixed-rate mortgages offer stability and predictability in monthly payments. By eliminating the uncertainty associated with variable rates, borrowers can better plan their finances and avoid payment shocks caused by fluctuating interest rates. The team at Astra Asset Management emphasizes the importance of financial certainty in mortgage refinancing decisions. This stability benefits investors twofold; reducing the risk of borrower delinquency and improving the overall performance of mortgage-backed securities.
3. Protection against Rate Increases: Opting for a fixed-rate mortgage for five years provides borrowers with protection against potential future rate increases. Shikha notes that the current inverted Bank of England yield curve indicates that the five-year forward rate is significantly lower than the three-month rate. This helps borrowers avoid default and ensures banks continue to collect interest on these mortgages, limiting potential losses for mortgage-backed securities investors.
4. Benefits for Banks: Astra emphasizes that banks also benefit from borrowers choosing fixed-rate mortgages. While banks may earn lower interest income, they reduce the risk of borrower defaults and maintain a steady stream of interest income over the fixed-rate term. This aligns with banks’ risk management approach and contributes to the overall financial stability of the banking system. Forinvestors in mortgage-backed securities, this helps maintain a steady stream of interest payments and limits the occurrence of foreclosures.

Astra Asset Management: A Trusted Partner in Mortgage-Backed Securities

Under the leadership of the chief investment officer Anish Mathur, Astra Asset Management combines in-depth market research, rigorous risk assessment, and innovative investment approaches to deliver exceptional results. The firm’s comprehensive understanding of the mortgage market, coupled with its alignment with client interest and performance track record, sets it apart as a reliable and disciplined partner to manage investors capital over the long term.

Astra Asset Management’s purpose is to provide clients with access to structured credit markets which require significant experience, deep structural and technical knowledge of the asset class, proprietary research and analysis.  The firm’s dedication to its strict investment discipline, asset backed philosophy and performance over AUM has earned it a strong reputation among institutional and individual investors alike. As Portfolio Manager of Astra AMCO’s hedge fund, Ms Gupta’s expertise and guidance ensure that clients receive tailored investment solutions that align with clients’ goals, risk tolerance, and market conditions.

Astra Asset Management UK Limited is authorised and regulated in the UK by the Financial Conduct Authority and by the Securities and Exchange Commission, in relation to US persons only, as a Registered Investment Adviser.

 The information in this article is for general information purposes only and does not comprise investment advice or an investment recommendation. It is not (nor is intended to be) particular to any investors’ individual circumstances and does not (nor is intended to) constitute either an offer to buy or sell or a solicitation of an offer to buy or sell any securities, in any jurisdiction. Forward-looking statements are not guarantees of future performance and undue reliance should not be placed on them: the value of an investment may fall as well as rise over time, and there is no certainty of any given return. It is possible to make a significant, including total, loss on any investment. Before making any investment decisions, prospective investors should take such investment, legal, financial, tax and other professional advice they deem necessary. Astra accepts no liability and assumes no duty of care in relation to the information contained in this article.