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.
This is probably the biggest mortgage related question on everyone’s lips at the moment and it is certainly very difficult to tell what is going to happen with interest rates. I can remember a conversation with a client almost 18 months ago where media coverage suggested interest rates were going to shoot up and they were worried the tracker product I had recommended might end up being very expensive.
In my opinion the question of whether to fix your interest rate comes in two parts. Firstly your attitude to risk should be taken into account and the severity of the risk assessed too. If you have ample income to afford higher interest rates then it comes down to your preference as to whether to gamble on variable type products, but if you simply couldn’t afford for your mortgage payments to go above current figures then not only should you be considering a fixed rate but also trying to reduce your borrowing levels asap.
The second part of the answer comes down to the difference between fixed rates and variable products, if the difference between a suitable variable product and a fixed is relatively low then even if you are a little risk averse it may be worth opting for a fixed rate. However when the difference is greater it becomes harder to say.
Let’s compare for example a 5 year deal currently on offer with one lender of 6.49% with a 25% deposit, compared to their 2 year fixed and 18month tracker product this is 3-4% higher and this means the chances of it being good value for money long term are much lower as it would require average interest rates over the next five years to be over 5% or so which is a big increase from current rates, hence I would only really recommend this scenario to someone who was really on the borderline of what they can afford and needed absolute long term security.
Many lenders are touting products with an option to switch to a fixed deal at a later date without early repayment charges, but for those who would be at serious risk of being unable to afford their mortgage if rates went up this is probably a poor option, as the reality is that fixed deals available at the time are likely to be higher than now as well.
It remains quite likely that while interest rates must increase at some point, that overall market competition will do too and to some extent increases in bank base rate are likely to be met with at least some reduction in lenders margins. Current two year fixed deals come with an average margin of about 3% over the bank base rate which would have been unthinkable three years ago, so at some point slowly but surely these differences must be eroded by competition as the market improves too.
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. 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. 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. 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.
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.
The Woolwich have announced a new tracker at 1.48% above base rate for the first year then reverting to 2.49% above base rate for life giving their lowest ever headline mortgage rate of 1.98% currently. The product has a minimum loan of £200,000 and maximum of £500,000 so it is quite restrictive, early repayment charges are 2% until the 31/01/2013 meaning it does tie you into the rate for some time as well.
The product has a £999 arrangement fee, and based on a loan of £200,000 at 60% a valuation fee of £415, lender Conveyancing fee of £126, land registry fee of £280 and completion fee of £35 while APR is 3.0%.
The biggest caveat to this product is that the option to switch to a Woolwich fixed rate without penalty during the early repayment charge period which Woolwich call “drop lock” does NOT apply to this product, so while its headline rate may be very tempting if there are significant rises in interest rates particularly in the second and subsequent years of the mortgage it could become very costly indeed particularly as early repayment charges on a minimum loan of 200K would amount to four thousand pounds as well!
For this reason I would thoroughly recommend speaking to a mortgage advisor or seeking mortgage advice about the suitability of this product if it has your interest, and as usual read the Key Facts Illustration prior to making any decision on a mortgage product.
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. There may be a fee for mortgage advice. The amount will depend upon your circumstances but it is typically £200 or up to a maximum of 1.5% of the loan value. Some buy to let and commercial loans are not regulated by the Financial Services Authority.
Further to last week’s post Cheltenham & Gloucester have announced a new product at 90% Loan to Value and a reduction in their five year fixed rates at 85% loan to value.
The new 5 Year fixed rate at 7.19% doesn’t look particularly appetising on paper with a £995 arrangement fee, Early repayment charges staggered at 5% in the first two years and then 4,3 & 2% consecutively for the remaining years, a valuation fee of £300 based on a loan of £100K, with APR at 4.8% and a reversion rate currently at 2.5% but it does reflect the general easing of criteria and willingness to lend at higher loan to value.
Again the reduction of .1% on their existing five year fixed rate at 85% loan to value won’t have Mortgage Brokers dancing in the streets but is a very small step in the right direction. It now has a five year fixed rate of 6.89%, £995 arrangement fee, Early repayment charges staggered at 5% in the first two years and then 4,3 & 2% consecutively for the remaining years, a valuation fee of £300 based on a loan of £100K, with APR at 4.6% and a reversion rate currently at 2.5%.
As usual refer to the Key Facts Illustration before making a decision on a Mortgage and seek independent Mortgage Advice to ensure the product is suitable.
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. We do not usually charge a fee for mortgage advice although you do have the option to pay up to 1.5% of the loan amount. Some buy to let and commercial loans are not regulated by the Financial Services Authority.
The Bank of England announced yesterday that bank base rate will remain static at 0.5% for another month which is more good news for the housing market, prospective borrowers and mortgage brokers.
In conjunction with massive falls in the London Interbank Offered rate recently, and small falls in Swap rates the stage looks set for continued reduction in mortgage interest rates over the coming months.
HSBC’s and Lloyd’s Group announced large rate cuts in the lower loan to value range last week and over the past few days several lenders have announced small changes to rates and criteria higher up the loan to value range.
While there has been little change in higher loan to value rates in the 80% and upwards category there is a feeling among the mortgage advice community that things will now start to ease in this category too perhaps for remortgages in the first instance but potentially for new purchase as well.
Whilst it’s unlikely we will see any products at 95% for new purchase soon things definitely appear to be moving in the right direction which can only be good news for homeowners and the economy at large.
I wrote recently about the tough decision some people are having to take about whether to fix their mortgage now or wait on their standard variable rate rises and with today’s announcement that base rate will stay unchanged at 0.5% the decision hasn’t got any easier.
There is however a nifty product currently being offered by Nationwide Building Society (one of the few lenders still touting for new business) which allows you to take one of their current tracker products now and switch it to a fixed rate whenever you choose without incurring early repayment charges.
Other providers have similar offerings however there is a difference which sets them apart. The Nationwide will allow you to switch to a fixed rate based on the Loan to Value of the valuation taken when you arrange your tracker, which means that if value’s continue to fall you will not be locked out of new deals.
You will have to pay a second arrangement fee however and you will be restricted to the fixed rates available when you decide to change which could be higher than those available now but if you aren’t sure which way to turn at least this offers a get out clause which normal tracker products will not.