I’m not sure how many times chancellor Alistair Darling has to say the same thing before he expects us to believe him. But in the recent Budget he was up to his old tricks, encouraging borrowers to take on the long-term fixed rate deals he thinks will bring stability to the housing market.
If I was being charitable I’d say it’s not his fault. I listened to an interview with former Conservative minister Michael Portillo recently and he said that from the moment politicians get into power they become cocooned in an artificial environment.
Labour has been in government for the past decade so it’s no wonder that many of Darling’s ideas seem off the wall. It appears he wants to believe the reports he commissions rather than the electorate.
He thinks he can persuade consumers to take out long-term fixed rate deals by encouraging lenders to lower the early repayment charges they levy on them.
But there is a fundamental flaw in his plans. The UK mortgage market is one of the most sophisticated in the world and does not have a central clearing wholesale market like the US, where long-term products are popular. Over there rates are similar to the ones seen here but the level of competition is much lower.
Even if lenders reduced their ERCs they would only stick higher rates on long-term deals, which defeats the object. Everyone is looking for the best deal and that’s why borrowers remortgage every two to three years.
The chancellor further confuses the issue by pointing to the likely payment shock many borrowers will face this year, saying that if they had taken out 20 or 25-year fixed rate deals they would be sitting pretty.
But many of these borrowers had access to ludicrously cheap products, some under 3% for two or three-year periods. This type of situation is unusual. Most lenders do not offer attractive short to medium-term fixed rate deals unless they are confident rates won’t rise above those levels during the timeframes involved. After all, they do not offer products for altruistic reasons, they do so to make money.
It just so happens that this time around rates have not gone the way their highly paid and largely inaccurate economists predicted. But this still doesn’t make the case for long-term deals, which time and again borrowers have rejected.
Rent-back should only be an option if the alternative is repossession
There has been much media comment regarding the rise of sale-and-rent-back companies but lately they’ve started to take a more sinister approach.
These firms are targeting estate agents and brokers by offering commission of 1% or more for successful transactions.
But they exploit vulnerable home owners and offer them at least 15% less than the market value of their properties. In most situations clients would be better off talking to and negotiating with their lenders to keep a roof over their heads rather than sell to these firms.
In many situations the rent they charge is unlikely to be much cheaper than the mortgages the clients had originally. The only benefit customers get is the release of some of the equity in their homes, but they pay a high price for it.
The website for one firm, Nationalhomebuyers.co.uk, looks professional. It’s so slick that the majority of the public would be easily persuaded to consider selling to it. But in reality, sale-and-rent-back should be the last resort before repossession looms.
The other thing that’s apparent from the website is that it’s completely one-sided. I don’t understand why trading standards have not clamped down on the sector.
If you are a broker thinking of referring to sale-and-rent-back providers, you must ensure your clients have explored all other options first.
Although this area of the market is unregulated, regulated brokers will be expected to apply the same standards as if it were – which is nothing short of what their clients deserve.