From well known high street retail chains collapsing into closing down sales and boarded-up premises to local businesses falling by the wayside, the credit crunch is by no means selective about who it picks on. We are all too aware of the negative effects it entails and just in case we weren’t, our ever-helpful government is on hand to tell us.
Last week schools secretary Ed Balls decided to throw in his tuppence worth and tell us the present crisis is worse than the de-pression of 1930s.
So we are united in our suffering. Or at least we were. The latest consequence of the credit crunch is to divide working people, specifically separating brokers from customers.
Falling interest rates, while greeted with delight by many borrowers, could sound the death knell for small brokerages. With rates so astonishingly low who needs to remortgage? Indeed, many brokers are spending their days advising clients to stay where they are and revert to their lenders’ SVRs, doing themselves out of proc fees in the process.
We polled brokers across the country to find out how you are coping with the lack of remortgage business and the results were unfortunately all too predictable. But we also detected an air of resilience and innovation which could help steer the sector out of the doldrums.
Rob Simpson, managing director of Coventry-based Simpson Financial Services, says mortgages formed a quarter of his firm’s business and it is seeing the effect of the decline in remortgage business.
“We have just compiled what we call our SVR list, which is a list of clients we have spoken to since last June who have come off their initial rates and to whom our advice has been to do nothing,” says Simpson. “Although we have earned nothing but goodwill in advising them to do this there will come a point when rates go up again and we can review them – it’s just deferring business.”
In the South-West things aren’t much easier. Alec Ruthven, director at AM Ruthven and Associates in Taunton, Somerset, agrees that times are tough.
“A lot of what I’ve done in the past is remortgage business and I work on the basis of giving best advice,” says Ruthven. “At the moment the best advice for clients is to go onto lenders’ SVRs. The special rates lenders are offering often include big fees so there’s little incentive to move.
“Our business is suffering because it’s hard to charge a fee for saying ‘do nothing’ so we are having to adapt and consider a fees-based service as commissions are hard to come by.”
For Allen Rosengren, chief executive of Bristol-based Falcon Group, there are some positives in the low interest rate environment despite the drop in remortgage business.
“Low interest rates are affecting remortgage business and in many instances clients are well advised to remain with their current lenders,” he says. “But those on fixed rates will be looking for alternatives. The upside offered by the low interest rate environment is that consumers will need to find a better home for their money rather than simply leaving it in savings accounts. This, and the fact that residential and commercial properties are cheap at the moment, is starting to drive the growing demand for new mortgages.”
Ronan Marrion, a mortgage adviser at Worldwide Financial based in Truro, Cornwall, says his firm is still getting remortgage business from customers who need funds for various reasons.
“We are busy at the moment,” he says. “Our advice to many customers is to stay put but there are those who want to buy or remortgage to consolidate. Many clients want to re-mortgage for home improvement purposes as this saves them Stamp Duty and other costs of moving.
“Also, because of our location we get new mortgage enquiries from clients wanting to buy holiday lets.”
In the South-East brokers are also feeling the pinch.
“The cut in interest rates does nothing to assist intermediaries,” says Danny Lovey, proprietor of The Mortgage Practitioner in Basildon. “On the contrary, if borrowers are on low SVRs there is no justification for taking them off unless they take a longer term view of, say, five years or more. This is not a time for two-year fixed rates or to change lenders at variable rates because of the costs involved. Also, we are now arguably at the bottom of the interest rate cycle or at least near it.
“For new purchasers, product choice is difficult. With first-time buyers the availability of mortgages is the problem as a 15% deposit seems to be the norm. With capital adequacy rules making a 90% LTV mortgage much more expensive than a 60% LTV one for lenders and no likelihood of this changing it’s difficult to see how we are going to get the market going.”
Kim Barrett, proprietor of KS Barrett in Bishops Stortford, says recent cuts in the base rate are not the fundamental problem.
“Business is tough at the moment, with not many new mortgage enquiries,” says Barrett. “The low interest rate environment is not the main problem – the issue is lenders being frugal with funds, and the funds being offered are at low LTVs which deter first-time buyers. This situation is likely to hinder the progress of the market for some time.”
Even larger brokerages such as London & Country are feeling the brunt of the Monetary Policy Committee’s decisions and it is warning borrowers not to be complacent.
“While the falling base rate has helped many borrowers, the combination of this and restricted mortgage availability has made it less clear cut for borrowers when they are trying to figure out whether remortgaging makes sense,” says David Hollingworth, mortgage specialist at L&C.
“But while this year will be tough, there are reasons for clients to take positive action. Not all SVRs have plummeted and with prices falling any delay could preclude them from getting the best deals as their LTVs worsen. Some fixed rate borrowers will need help in deciding whether paying an early repayment charge to grab a lower rate is a possibility and others will get off the fence and lock into low fixed rate deals before rates turn.”
Rob Roberts, senior adviser at Chesterton Grant in Chester, says low interest rates simply add to the problems brokers were already facing.
“At the moment I’m wondering where to put all the files being marked as NTU – not taken up,” says Roberts. “A large number of the customers I signed up in November, December and January on what would then have been beneficial deals are now getting calls from me advising them not to complete because it’s no longer in their best interest to do so. Almost all the income that would have been generated from those cases has evaporated.
“And that’s just those who were at 75% LTV and below. Borrowers who need more than 75% LTV are already aware that there’s no point in remortgaging. We need one brave lender to come to the market with 90% LTV for remortgages.
“They all say there’s too much risk as house prices are still falling but I believe there is more to it than that,” he adds. “They messed up before and are now exploiting market conditions to only lend to the best clients, and even then they are charging huge margins.”
Roberts adds that house prices are falling because consumers can’t buy property because there are no mortgages available. And there are no mortgages available because lenders thinks it’s too high a risk to lend because property prices are falling. It’s a vicious circle.
He says that although there is other business his firm can do such as reviewing protection needs and identifying other opportunities to refer business to its IFA department, the core of his business has been ripped out.
“The meat and drink of our business has been destroyed,” he says. “It didn’t need to be that way but with lenders profiteering to recoup the losses they have incurred in the past six months due to their poor practices, margins on rates are appalling. Tracker differentials at more than 2% above base are surprising at best and exploitative at worst. Previously, you could get a deal at base rate or perhaps base plus 0.25% on a two-year tracker. Now, with two-year swaps at all-time lows, margins are at record highs.
“Not only is nobody doing anything about this but the gov-ernment is actively encouraging the practice by having state-owned lenders leading the way on it as well as taking the offensive in the dual pricing debacle.”
Grant Pollock is managing director of Johnston Financial Services in Edinburgh. He agrees that from a broker’s point of view base rate cuts are by no means welcome.
“It’s great from a personal point of view as I’m on a tracker but from a business point of view it is not good,” he says. “Last year we relied on our existing client book to remortgage them when their deals expired but latterly this has become almost impossible due to the low SVRs clients are able to revert to without fees.
“It has become difficult to show clients the benefit of re-mortgaging. When longer term fixed rates bottom out my advice will be that clients should grab them if they are suitable. I think most lenders know this too and they are afraid to reduce rates in case they are inundated with applications.”
The decline in remortgaging means brokers are battling harder than ever for business. But it’s not just the interest rate falls that are causing problems. The lack of lenders willing to launch decent products together with the crisis of confidence among consumers means brokers are facing their toughest challenge yet. Is this a problem too far? After years of false alarms heralding the end of the broking sector, could it be that this time the bell has tolled?
Not according to Martin Reynolds, development director at PMS.
“Yes, we are in a situation in which there are such low interest rates that remortgaging borrowers is difficult if not impossible,” he says.
“But brokers have to look further than mortgages in the short term. With the money customers are saving thanks to the excellent broking that got them their deals in the first place, brokers could look at helping them with overpayment, accident, sickness and unemployment cover or savings products while the market is in a state of flux. Then, when remortgages become available customers will come back. Clients are confused about what is happening and the information we can offer is more important than ever.”
Robert Sinclair, director at the Association of Mortgage Intermediaries, agrees.
“Customers are still voting with their feet and looking for advice from brokers to get the most appropriate and best deals,” he says. “While wanting to serve customers through their branch networks banks still recognise the importance of brokers and are committed to having visible intermediary forces.
“It is important that brokers ensure customers are fully pro-tected and look at more than just mortgages.”
If ever there was a time for brokers to diversify it is now. There is no point hanging on to the hope this cloud will pass over soon. While there is still optimism about a recovery, proactive steps are needed in the meantime.
So expand your business, extend your qualifications and make yourself indispensable. It may seem like a lost cause but it’s not over until it’s over, and there’s still fighting spirit in brokers.
Low rates help few consumers
Nick Blunt Head of Business Partner Development Mortgages for Business
The five base rate cuts we’ve seen in five months have had little effect on the mortgage market or the economy. We’ve fallen into recession, mortgage approvals hit an all-time low in November and although December picked up a bit we are still bumping along the bottom.
Importantly for your clients there’s still a lack of mortgage products, particularly for anyone who isn’t lucky enough to have a substantial deposit. Meanwhile, sub-prime clients are virtual pariahs.
The philosophy behind cutting rates is simple – easing the cost of credit puts money into people’s pockets and encourages them to spend, kick-starting the economy.
But there are two problems. First, only the few borrowers lucky enough to be on base rate trackers get the full benefit of cuts. Some are constrained by the small print in their loan agreements which specifies a rate below which their mortgage will not fall.
And borrowers on SVRs are paying a wide range of rates but in all cases considerably more than 1%, so the fortuitous ones who have had hundreds of pounds lopped off their mortgage bills are few and far between.
Also, the falling base rate has had precious little impact on the cost of personal loans, credit cards and other unsecured debts.
The second problem is for savers, of whom there are far more than mortgage holders. They have been squeezed, with pensioners and many other households that rely on investment income feeling the pain. From a retail bank or building society’s point of view the economics of a low rate environment make it difficult to attract deposits from savers who start to look for other places to put their money, including under the bed.
With wholesale markets disrupted, the lack of retail deposits removes a big source of funding to finance mortgages.
Part of the purpose of lower interest rates is to boost confidence but with morale at a low ebb, putting more money into people’s pockets does little to improve things. Rather than go out and spend they overpay on their mortgages or save up in case they lose their jobs.
Interest rate changes take time to work their way through the system and this movement towards zero represents a stage before the Bank of England takes the drastic step of quantitative easing – a euphemism for printing money – with all the inflationary risk that entails.
So it looks as if the last cut was a cut too far for clients and brokers. Aside from boosting your efforts to persuade borrowers that now is the time to move to long-term fixed rate deals it will do little to help you find remortgage deals for most clients, and it won’t encourage significant numbers of nervous first-time buyers to take the plunge, fearful that house prices will fall further.
Interest rate cuts are like throwing pebbles at a charging lion
Fahim Antoniades Director Quantum Mortgage Brokers
The Bank of England’s role as we have known it for many years is coming to an end. No longer can it plod along using the base rate as a pressure release valve for regulating economic activity – at least, not in the present climate.
While I am all for rate reductions to ward off deflation and help the one-third or so of mortgage holders on tracker rates, everyone agrees that given the state of the economy, base rate reductions are like throwing pebbles at a charging lion.
Forget the recession – we are perilously close to entering a depression. Set against this backdrop the desire to cut the base rate is understandable, but what does it mean for us brokers? Well, on the face of it a low interest environment should be good news. Lending rates are at an all-time low and given that the majority of mortgage deals are arranged over a two to three-year period we should be salivating over how much business is coming up for renewal.
But what nobody expected was the severity of the credit crisis, how this would lead to the near-paralysis of mortgage lending and how it would kick the normal rules of engagement out of the window.
A couple of years ago a tracker deal at base rate plus 0.75% would have been deemed acceptable and perhaps even a good product if it was a penalty-free lifetime rate.
Today, anything below base rate plus 2.5% – a margin traditionally associated with heavy sub-prime – is considered to be good.
And of course, by now we are all too familiar with the pattern of lenders repricing their tracker rates upwards after base rate reductions.
Even so, rates are much lower than they have been historically so while there is scope to remortgage older deals the liquidity crisis has dragged property prices down, nullifying remortgage deals on loans over 75% LTV.
And with tracker margins being so high the case has to be made for opting for fixed rates in case the environment changes, especially while fixes are at an all-time low.
The biggest problem is LTVs
Ray Boulger, Senior Technical, Manager, John Charcol
It’s easy to find reasons why the latest base rate cut will make life more difficult for brokers. With Halifax, Cheltenham & Gloucester, Lloyds Banking Group, Nationwide and Skipton forced to pass on rate cuts in full as a result of their SVRs being at the maximum margins above base rate allowed in their terms and conditions, there’s even less reason for borrowers on SVRs to remortgage.
And the majority of other lenders that cut their SVRs will do so by less than the full 0.5%, although most have only a small proportion of borrowers on SVR.
But the bigger issue is that as house prices continue to fall and valuers continue to be cautious, an increasing number of borrowers are passing the critical 75% LTV threshold at which point many will baulk at the prohibitive rates being charged for higher LTV deals.
Of course, an increasing number will also cross the 90% LTV threshold at which point they will find nothing to remortgage to.
Brokers have to survive in the short term but in the longer term we need property prices to stabilise and perhaps then increase, albeit not too quickly.
We have seen a significant surge in the number of purchase enquiries in the past few weeks and a key reason for this is the low base rate.
February’s cut will further encourage prospective purchasers and although some will not be able to find large enough deposits to allow purchases to proceed I believe that the volume of housing transactions has bottomed out and that numbers are likely to increase slowly from now on.
The Bank of England’s quarterly report on the inflation situation and its governor Mervyn King’s comments last week both made it clear that quantitative easing – i.e. the Bank buying longer term gilts and other securities such as asset-backed securities from the private sector – is likely to start as early as next month, and this had a dramatic effect on gilt yields.
The yield on two-year gilts fell by almost 0.5% in two days while five and one-year yields decreased by 0.38%. This will filter through to swap rates which means fixed rate mortgages will become cheaper in the next few weeks.
The point at which most borrowers switch away from SVRs, or indeed tracker deals, will be when they decide the time is right to buy fixed rates. And with fixed rates likely to become cheaper in the near future, that time is getting closer.
Meanwhile, if the quantitative easing strategy works the increased supply of money in the system might even herald a bit more competition between lenders.
But I’m not holding my breath in anticipation of that just yet.