Whilst it remains unclear how close we are to a collapse of the Euro, one thing is clear; predicting how the fallout would affect financial markets is no easy task, even for seasoned financial experts.
In pure mortgage terms, one set of products appears to be particularly risky in the current market; is any which tracks a variable rate as opposed to the Bank of England base rate. These include discounted rates, variable rates and Libor-linked or Libor-rate deals.
All of these products could be subject to increases if the Euro collapsed, even if the monetary policy committee of the Bank of England decides to keep interest rates low.
When the BOE base rate was reduced heavily in 2008, many lenders did not pass these cuts into their variable rates for some time; as doing so would have seriously jeopardised their ability to remain afloat.
Similarly, in the scenario of the collapse of the Euro and or the default of a nation such as Greece, Spain or Italy, this would undoubtedly cause a similar crisis in the banks leading to a drying up of money markets and upward pressure on banks’ variable rates.
Most discount-rate mortgages are offered by smaller building societies, which typically have a much lower risk exposure and would be better insulated against having to raise their variable rates significantly in a similar scenario. However, they are not immune to this risk.
More concerning, though, are Libor-linked deals; these are linked to the going rate of lending between UK banks and could rise a lot if we saw more market turmoil.
Even so, tracker deals could still be a risk; who knows how the different repercussions of this kind of event could ultimately play out?
So when looking at current products, comparing the difference between fixed and variable rates, in general, is well worth doing. I would take a pragmatic approach where the difference is minimal, as it seems likely that the last string of bailouts may yet prove to be the tip of the iceberg.
One of the most bewildering and confusing items on any mortgage illustration must be the Annual Percentage Rate or APR listed on a product.
APR gives a comparative measure between various loans to show the overall cost of borrowing on an annual basis, taking into account a broad range of fees, not just the interest alone, as well as giving a more direct comparison of the impact of a daily calculation of interest versus other less favourable terms.
Now, that is a good thing where the calculation makes sense, but for mortgage products, in its current guise, it makes no sense at all.
A simple look at the best buy tables on our website will show you; a product far cheaper during its initial deal may have a much higher APR than a product with a considerably higher interest rate and identical fees.
That is because the APR is calculated over the whole lifetime of the loan and will include the reversion rate of the product after its initial term.
There are several reasons why this is misleading;
- Reversion rates are generally variable and are not linked directly to the Bank of England Base Rate. In two years a lender with a previously un-competitive reversion rate could lead the market and vice versa. Hence it is not a factor that should play a major part in the decision-making process.
- Generally, customers should remortgage regularly during the early years of their mortgage repayment to ensure a competitive interest rate, including the reversion rate after the initial mortgage term distorts the picture.
- A clever design can skew the figure. Lifetime trackers appear very competitive because they have no reversion rate, and refunding upfront fees affects the calculation but could cost a pretty penny if the loan never goes ahead.
APR is a system that was never really designed for mortgage contracts but has become a legal obligation when advertising them; due to the confused dual regulatory system; between the FSA and the Office of Fair Trading. APR makes some sense on unsecured loans and little in the mortgage market.
It is high time that dual regulation ceased and APR calculations either scrapped on mortgage contracts or replaced with something far more specific to the complex nature of a mortgage product.
When a mortgage broker arranges a mortgage for a borrower the commission they receive (if they take the commission as opposed to a fee) is not standardised but there is however only a limited difference from lender to lender. Typically the percentage is about 0.3 to 0.35% for a residential mortgage with good credit, 0.40 to 0.45% for buy to let mortgages, and slightly higher for adverse credit applications.
Why then are several banks, one of which I won’t name but is almost entirely government owned (guess who?) is loading rates available via intermediaries by anything up to 1% against an equivalent product available through them direct? If these lenders are proposing that it costs them more to accept intermediary applications this is farcical.
They may argue that the intermediary market would simply direct too much business to them which they don’t have funds to supply. This is plausible but I think it is actually pricing intermediary products out of the market to attract business from consumers direct who can then be goat herded into higher rate products with down valuations and clandestine credit scoring, or even lower rate products with ridiculous fee’s which are more expensive in reality. Without a broker to argue the case and guide on fee’s most people will simply accept being cascaded to a higher rate without asking difficult questions, or being declined an application having paid for valuations and the like.
I want someone to actually put the question to these banks, how is this rate loading fair practice and why is it in place? Because to the educated it seems to be the intention to get mortgage advisors out of the market so that dodgy products can once again be sold in bulk. Just look at the return of long early repayment charges on market leading rates as a sign that lenders are looking for ways to lock customers into potentially crippling mortgage rates.
Findaproperty.com’s new house price index suggests that house prices have remained stagnant at the bottom of the market while large rises in higher-value properties are propping up the major indices.
Their figures, collated from average asking prices on the website over the past month, show high-value properties climbing at 6.6% annually against a monthly rise of 0.3% for first-time buyer properties, leaving them still down -4.6% year on year.
That would suggest that difficult lending conditions for first-time buyers continue to drag down property prices as second times buyers struggle to find a buyer who can afford their property in the current market.
However, there is good news in the bag as average first-time buyer affordability has improved dramatically, fuelled by the price reduction.
Their figures for the affordability gap, or the average deposit required, show a drop to £55,700 or 1.74 times gross household income, against £71,000 or 2.8 times gross household income in January 2008.
Overall the indices showed a 0.2% rise over the August figures, leaving the average national asking price at £218,134.
