Despite the decision to freeze interest rates at 4%, many lenders have pulled their rates or repriced them upwards. Lenders seem increasingly nervous about offering attractive long-term fixed rates – understandably, given all the speculation about the size of possible base rate increases. This uncertainty leaves the adviser in a quandary over product recommendation. What do you say when your customer asks for an opinion on future interest rates? When it comes to product recommendation do you err on the side of caution and recommend a fixed or a capped rate or do you look at cheaper variable, discount or tracker deals in the hope interest rates remain stable or even come down?
One underused solution to this dilemma is to recommend a multi-product arrangement. Many lenders offer this from their product range. Simply, it involves splitting the loan between different deals. For example, you might split a £100,000 mortgage loan in two, recommending £50,000 on a fixed rate to benefit from the security of a fixed payment amount and the remainder on a discount or tracker rate to benefit from initial lower monthly payments, thereby gaining the benefits of both of the schemes.
To explain how this works in practice, consider the following situation, which assumes an interest-only mortgage loan of £100,000 over 25 years with a two-year scheme period required.
By selecting a 4.99% fixed rate, monthly payments would be £415.83 – a total cost of £9,979.92 over the two years.
By selecting a 4.30% (0.30% above base rate) tracker, monthly payments would be £358.33. Assuming no increase in base rate, over the two years the total cost would be £8,599.92.
Under these circumstances the client is £1,380 better off on the discounted rate. But how likely is it that interest rates will remain constant over the next two years? Such is the adviser's dilemma. A 1% rate rise would equate to a £83.33 increase in monthly payments. Any increase would soon eat away at the savings of the tracker rate, especially as some predict rates will top 6% within the next couple of years.
For our example I will assume a 0.25% increase (£20.83) every quarter for the next two years taking the Bank of England base rate to 6%:
£358.33 at 3 months = £1,074.99
£379.16 at 3 months = £1,137.48
£399.99 at 3 months = £1,199.97
£420.82 at 3 months = £1,262.46
£441.65 at 3 months = £1,324.95
£462.48 at 3 months = £1,387.44
£483.31 at 3 months = £1,449.93
£504.14 at 3 months = £1,512.42
The total to pay under these circumstances is £10,349.64, ultimately making the fixed rate option more financially attractive (hindsight permitting).
Consider the multi-product option: £50,000 on a 4.99% fixed rate and £50,000 4.30% tracker rate.
Fixed rate: £207.92 per month, two year total cost £4,990.08
Tracker rate: £179.16 per month, increasing at the same 0.25% per quarter (£10.41):
£179.16 at 3 months = £537.48
£189.57 at 3 months = £568.71
£199.98 at 3 months = £599.94
£210.39 at 3 months = £631.17
£220.80 at 3 months = £662.40
£231.21 at 3 months = £693.63
£241.62 at 3 months = £724.86
£252.03 at 3 months = £756.09
The cost to pay is £5,174.28 which, when added to the fixed rate (£4,990.08), makes a total of £10,164.36.
Obviously depending on the degree of certainty required you can vary the loan split. The more cautious the borrower, the more of the loan will be suitable for the fixed or capped rate. It Is worth remembering there is no danger of your client having to pay two or more booking or arrangement fees. And the chances of you misjudging future interest rate movements whether these be upward, downward or indeed remain constant are mitigated. Contact your lenders' BDMs to establish each lender's stance on multi-products.