Deal dilemma

14 June 2010 | By Christine Toner

hese are uncertain times. We not only have a new government but a coalition one. We’ve been told to expect spending cuts but not where they will come from. And we also know the Bank of England base rate must rise at some point but we don’t know when or by how much.

In an article for Mortgage Strategy this week Michael White, chief executive of Email Mortgages, talks of the need for interest rates to rise.

“The belief that a base rate of 0.5% is normal and sustainable for the long term is as wrong as believing it is acceptable to live off benefits or subsidies for an extended period,” he writes.

There are few among us who believe the low base rate environment we have been in for some time is sustainable. But it’s not just the industry that would like more clarity on when the base rate will begin its upward journey.

Borrowers, keen to secure the best deal, are torn between fixing their mortgage or opting for a tracker and hoping for the best. So what should brokers be advising them? Industry experts have varying views on base rate movements.

Katie Tucker, chief operating officer at Private Finance, believes we will see relatively conservative rises in the next two years.

“Two-year swap rates remain low at 1.54%, indicating that lenders are not substantially altering their long-term base rate and LIBOR projections despite the change of government and rising inflation,” she says.

“To swap at 1.54% could indicate that, on average, lenders believe the cost of borrowing and possibly the base rate too will go from its current level to between 2.5% and 3% over the next two years.”Fahim Antoniades, group director at Mortgage Centre IFA, is expecting a smaller rise of 0.25%, although he admits it’s far from easy to predict.

But most commentators do not predict much activity this year. Ray Boulger, senior technical manager at John Charcol, thinks the base rate

ill remain at 0.5% this year and doesn’t expect to see any significant increase in swap rates.

“In fact, I think it’s more likely that swaps will fall further,” he says.

Some experts believe the government’s plans will play a part in keeping rates low for now.

“Prime Minister David Cameron recently announced that austerity measures will have to be even tougher than expected so on balance I believe rates will remain on hold this year but rise gradually during 2011,” says Charles Haresnape, group mortgage services director at Connells. “The average of independent medium-term forecasts suggests rates may get up to 4.5% by 2014.”

One of the biggest influences on what type of product customers prefer is the media. The doom mongers have been more influential than they could have imagined since the credit crunch hit. The collapse of Northern Rock is often attributed to the furore in the national press after news broke of problems at the bank.

Mark Graves, managing director of network Linear, says the press has also had some influence on the public’s choice when it comes to mortgages.

“In terms of trends demand has fluctuated depending on the media scaremongering,” he says.

“Newspaper headlines push consumers towards fixed rates but overall trackers have provided most flexibility in the past two years.”

Other brokers have noticed similar trends.

“Since May only a third of our mortgages have been on fixed rates,” says Tucker. “The low rate tracker deals look too tempting and in two years the risk of rates shooting up enough to make the equivalent fixed rate attractive is evidently not enough to sway clients.

”Borrowers approaching John Charcol for advice have been of a similar mindset.

“A sizable majority of our clients are choosing trackers and have been doing so since last August, although there has been a small rise in the proportion choosing fixed rates in recent weeks,” say Boulger.

“Part of the reason a higher proportion of our clients have been choosing trackers is that this is the advice we have been giving most of them, and to a lesser extent because of our typical customer profile. But of course, individual circumstances influence our advice anyway.”

Boulger says the modest increase in the popularity of fixed rates in the past few weeks could initially be put down to interest rate worries before the general election. More recently, he says it is due to the fact that cheaper longer term fixed rate deals have become available.

Mortgage Centre IFA deals primarily with high net worth clients. Antoniades says these types of clients have also been opting for tracker rates.

“The momentum is still with trackers, largely because the margin between them and fixed rates has been high enough to make trackers more favourable, even allowing for interest rate rises in the next couple of years,” he says.

But at Connells, Haresnape has noticed a more even divide.

“We are seeing a pretty even split between trackers and fixed deals,” he says. “First-time buyers seem to be going for trackers to keep their monthly costs down. They are prepared to take more of a gamble. Others traditionally believe in fixing irrespective of rate forecasts so they can be certain of their costs.”

Of course, as Boulger pointed out earlier, what a client opts for depends heavily one what advice they receive, and rightly so.

So what advice would brokers offer clients at the moment in terms of whether to go for a fixed deal or a tracker?

“I don’t believe you can categorically give advice based on what rates will do in the future,” says Antoniades.

“For every expert who says rates will rise there is another one who says they will stay the same so it becomes a matter of opinion rather than advice.

“When guiding clients towards their decisions you must take into account their risk profile as well as issues over the length of time they envisage having the introductory rate,” he adds. “This is something that can only be done on a case-by-case basis.”

Graves agrees and says it’s crucial that clients and brokers have an open mind and let the facts and clients’ circumstances point to the best product.

“Lender administration is also starting to influence the choice of products offered to clients,” he says.

Tucker says that since lenders have already priced in the risk of the base rate going up it comes down to how secure clients want to feel.

Boulger says he would recommend a tracker for most clients but a five or 10-year fixed rate for those who clearly favour stability or would struggle if the base rate rose to more than about 2%.

Haresnape agrees that consumers can only be dealt with on a case-by-case basis.

“Our advice depends on customers’ specific circumstances but those wanting a two-year deal that have some sort of budget buffer are probably more likely to favour trackers,” he says.

“For those with tighter affordability we would recommend a good fixed rate. Fixed deals certainly represent good value where the customer has at least a 20% deposit.”

Peter Curran, director of intermediary mortgages at Lloyds Banking Group, says the choice between trackers and fixed rates depends on attitudes to risk.

“We are seeing slightly more trackers than fixed deals at the moment,” says Curran. “It’s about a 60-40 split but this could change depending on client attitude and the rates we charge.”

He adds that customers’ individual circumstances must play a big part in the decision.

A customer might decide that while a fixed rate is more expensive in the short term the peace of mind they will benefit from in the long term is worth the extra cost. But with the base rate still so low and the nature of any rises unknown Curran says making predictions is difficult.

“It’s a bit too soon to say we’re seeing a change of mindset among consumers,” he says. “There is certainly a significant demand for fixed rates but everyone is different. From the numbers we get we know there is a demand for both types of deal. It’s probably always going to be too much of a generalisation to say a certain sort of person prefers a certain type of mortgage.”

And Curran says this is good news for intermediaries.

“Of course, this is where brokers come into their own because their job is to do a full fact-find and determine precisely what the customer needs,” he says.

“When rates start rising, depending on how fast they do it’s fair to say at that point a lot of consumers and brokers will look at fixing. That could be in Q4 2010 or Q2 2011 - I don’t know the precise timing but I do know we’ll see more demand for fixes.”

Media speculation and broker advice aside it’s the figures that tell the true story for borrowers, and there are some good deals in the market at the moment.

“Lifetime deals are easily the best value in the tracker market right now,” says Boulger. “Depending on the LTV the best deals are from First Direct, Woolwich, Alliance & Leicester, In The Loop and Saffron. And Accord Mortgages is offering the best fixed rates.”

Tucker also cites Accord as one of the best options at the moment.

“For large loans we like Accord’s 3.14% two-year fix with a £1,995 fee via Legal & General or PMS because the fee is flat and the loan goes up to £750,000,” she says.

Lifetime deals are easily the best value in the tracker market at the moment, while Accord has the best fixed products

“Accord also has a five-year fixed rate at 4.19% with a £1,995 fee. This rate can compete well with a term tracker. Good variable rates for large loans include Woolwich’s 2.69% term tracker with a flat fee of £1,499.”

In the three years since the credit crunch hit commentators have been keen to find trends in borrowers’ attitudes not only to the mortgage market but also to risk.

Boulger says fixed rates steadily rose in popularity among John Charcol customers in the first half of 2008 but from mid-2008 their popularity collapsed as the brokerage advised clients to take out trackers, having discerned that the base rate was near its peak.

“In October 2008 the demand for trackers was at its peak, with 86% of our clients taking them out,” says Boulger. “Fixed rates started to rise in popularity in early 2009 as the base rate fell steadily and the cost of fixed rate mortgages fell sharply.

“But from July 2009 when fixed rates costs increased and it became increasing clear that the base rate would have to remain low for quite a while trackers again took over as the most popular option, with the tracker/fixed rate split averaging around 80-20 in the past six months.”

Antoniades says while Mortgage Centre IFA customers are still opting for two-year products and predominantly trackers, offset deals have gathered momentum, given the dire rates of return on traditional savings products.

Interestingly, Connells has witnessed a gradual movement back towards fixed rates and away from trackers in the past year.

“It fluctuates,” says Haresnape. “Fixed rates have become more competitive. In the past three months we’ve seen a 60-40 split in favour of fixed rates.”

While risk is the buzz word at the moment Tucker says it’s worth considering the vast number of existing mortgagors who are choosing to stay on their reversion rates.

“This greatly increases the percentage of people who think the risk of a rate rise is insufficient for them to fix,” she says.

Predictions are tough at the best of times but with a government like we’ve not seen before in an economic climate unlike any other they’re nigh-on impossible. But one thing’s for sure - the base rate can’t stay where it is forever.

Much like the false peak the market hit in 2007, the lowest rate on record too is a false low. Normality must return and in the run-up to this fixed rates could surge. In the meantime, trackers are enjoying their time in the sun.

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