Skip to content

  1. Home

How the potential collapse of the Euro could affect your mortgage costs

Whilst it remains to be seen how close we really are to a collapse of the Euro one thing is for certain, predicting how the fallout would affect financial markets is not an easy task even for seasoned financial experts.

In pure mortgage terms one set of products appear to be particularly risky in the current climate – any product 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 large rises in this potential scenario even if the monetary policy committee of the Bank of England decides to keep interest rates low. As we saw 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 an upward pressure on banks variable rates.

Most discount rate mortgages are offered by smaller building societies who in general have a much lower risk exposure and would be better insulated against having to raise their variables rates significantly if this happened and this was mirrored by the rate reductions in 2008. However they are not immune to this risk, rates which are more concerning though are Libor linked deals as these are effectively priced against the going rate of lending between UK banks and as such 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 and 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.

High time APR or Annual Percentage Rate interest calculations were removed from mortgage products

One of the most bewildering and confusing items on any mortgage illustration from my point of view must be the Annual Percentage Rate or APR listed on a product. APR was developed to give a comparative measure between various loans to show the overall cost of the borrowing on an annual basis taking into account a much broader range of fees and charges than the loan interest on its own.

Now that’s a good thing where the calculation makes sense, but on 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 that a product far cheaper during its initial interest rate term may have a much higher APR than a product with a considerably higher rate of interest. The issue is that APR is calculated over the lifetime of the loan and so will also consider the reversion rate of the product after its initial term.

There are several reasons why this is misleading;

  1. 1. Reversion rates are generally variable and not linked directly to bank base rate. In two years time a lender with a previously un-competitive reversion rate may well be leading the market and vice versa – hence it is not a factor that should play a major part in the decision making process.
  2. 2. You would generally regularly remortgage during the early years of your mortgage repayment to ensure a competitive rate of interest so including the reversion rate after the initial mortgage term distorts the picture.
  3. 3. Clever design can skew the figure. Lifetime trackers appear very competitive because they have no reversion rate, and refunding upfront fee’s 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, it makes some sense on unsecured loans and very little in the mortgage market.

It is high time this dual regulation was removed and APR calculations either scrapped on mortgage contracts or replaced with something far more specific to the complex nature a mortgage product.

Why the rate loading Mr Lender?

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.

House Price rises driven by larger properties

Findaproperty.com’s new house price index suggests that house prices have remained stagnant at the bottom end of the market while strong 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 o.3% for first time buyer properties leaving them still down -4.6% year on year. This would appear to suggest that the difficult lending conditions for first time buyers are continuing to drag down property prices as second times buyers struggle to find a purchaser who can afford their property in the current market.

However there is good news in the bag too with average first time buyer affordability improving dramatically fuelled by the price reduction. Their figures for 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 on August figures leaving the average national asking price at £218,134.

You can see their results and the rest of the overview here Find a property.com’s September House Price Indices

THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT. YOU DO NOT HAVE TO PAY A FEE FOR OUR SERVICES AS WE RECEIVE COMMISSION FROM LENDERS. SOME BUY TO LET AND COMMERCIAL LOANS ARE NOT REGULATED BY THE FINANCIAL CONDUCT AUTHORITY
© RIGHTMORTGAGEADVICE.CO.UK 2009-2016
RIGHTMORTGAGEADVICE.CO.UK IS AN APPOINTED REPRESENTATIVE OF JULIAN HARRIS MORTGAGES LTD, AUTHORISED AND REGULATED BY THE FINANCIAL CONDUCT AUTHORITY. FSA NO 304155
THE FINANCIAL OMBUDSMAN SERVICE (FOS) IS AN AGENCY FOR ARBITRATING ON UNRESOLVED COMPLAINTS BETWEEN REGULATED FIRMS AND THEIR CLIENTS. FULL DETAILS OF THE FOS CAN BE FOUND ON ITS WEBSITE AT WWW.FINANCIAL-OMBUDSMAN.ORG.UK

Get advice
Request mortgage advice
close the form
Your details
Contact details
Enquiry details

Request impartial advice from one of our qualified mortgage brokers. By pressing submit you agree to the Terms & Conditions and Privacy Policy.