Advice needs to get more sophisticated
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Despite the Bank of England base rate remaining at a historic low for the past three years, the remortgage market was up last year compared with the previous two years. But it looks unlikely the same will be true this year.
Last year mortgage pay rates dropped in the middle of the year, with the interest rates that borrowers could get on a new mortgage starting around the 2% or 3% mark, less than many SVRs.
So for some clients there was a benefit in changing rates, especially if they were looking to fix. These low rates tempted a new pool of people to consider remortgaging.
Economic forecasts are nearly always wrong, the only question up for debate is how wrong
But as we’ve moved into 2012 pay rates have risen again and as new mortgage rates look less attractive compared with SVRs, there may be less incentive for borrowers to remortgage.
Rates are rising because the amount of inter-bank lending remains tight and may even get tighter this year as trust between the banks remains low. This means there is a risk that mortgage lending this year could be distinctly lower than it was in 2011.
While the number of higher LTV mortgages has increased recently, I don’t expect to see much more movement in this direction. With restricted funds available, lenders are likely to continue to focus on those with higher deposits and only release higher LTV mortgages in limited tranches.
As a result brokers and networks need to be more sophisticated in their approach this year. We should change our thinking to consider that if we can’t give clients what seems a cheaper mortgage rate right now, what can we give them instead and how else can we help them?
Dangerous reliance on economic forecasts
Thinking of rate predictions and the impact they have on what we offer clients made me reflect on a year ago when there was a rise in the number of fixed rate mortgages sold as economists were convinced interest rates were going to rise by Easter and then keep on rising.
Last week I went to a presentation where the same economists declared with equal conviction that the base rate would not rise until at least 2014. So how can we base our advice on the comments made by economists this year when their previous predictions were so wrong?
If economic circumstances change, the pound rallies, the US economy proves to be stronger than previously thought - which it is showing signs of doing so in this election year - or people in the UK continue to buck the forecast and keep spending, we cannot be certain that interest rates will not rise at some point in the next 12 months.
Not only that, but there is often little consensus between economists on what they feel is going to happen, so should we be basing our advice to clients on the latest economic forecasts?
How is it that economists can get it so wrong so much of the time? One economist told me that in economic circles, if an economist gets it right 60% of the time they are considered good. I found this astounding - imagine the uproar if a financial adviser only got it right for their clients 60% of the time? I’m fairly sure we wouldn’t be considered good.
The moral of the story is - don’t just listen to economic forecasts when giving advice to your clients. Any mortgage needs to be right for their individual circumstances, their attitude to risk and myriad different criteria that you take into account every day.
Economic forecasts are nearly always wrong, the only question up for debate is how wrong.
Buy-to-let
There’s a lot of talk about buy-to-let at the moment and whether the sector will continue to boom this year. For lenders, buy-to-let lending to professional landlords is an opportunity as it provides an attractive margin at a good risk - especially when lending to professional landlords at 85% LTV or below.
Both amateur and professional landlords seem keen to grow their property portfolios. Rents are at an all-time high and as house prices are no longer rising rapidly, people are now buying for yield rather than for capital appreciation.
This means the quality of the book is better where lenders are concerned, as individuals are no longer borrowing with the hope of turning it around and selling it on in a couple of years to make a fast buck.
The view is now a longer-term one, so it’s more important for landlords to make it work, to ensure their properties are in a decent state and the mortgage is paid to achieve longer-term yields.
Given this scenario, I believe buy-to-let will continue to grow as a proportion of mortgage lending this year. It is good to have new players, such as Abbey in the market. There was great anticipation around its launch although we are still waiting to see what impact this will have.
The buy-to-let market expanded last year with valuable contributions from a wider range of lenders such as Coventry and Leeds building societies and Northern Rock, so it will be interesting to see if anyone is able to challenge the leadership of The Mortgage Works and BM Solutions this year.
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