As intermediaries you operate in a world of mortgage interest rates. They are familiar to you and their relationship to the Bank of England Base Rate (BBR) is one you understand.
To people who don’t work in the industry, let alone those who have never taken out a mortgage before, rates of interest can be complicated and far from the most exciting aspect of buying a first home.
Part of the value you can add as a mortgage adviser is to help your first time buyer clients to, firstly, understand mortgage rates and secondly, to have a broad understanding of the relationship between the BBR and mortgage pay rates.
The effect of speculation
Just a hint of an interest rate rise can drive consumer behaviour, influence lender pricing and move financial markets.
You may have experienced this – for example, more of your clients may look to fix their rate when a base rate rise is expected, or alternatively a boost in remortgage activity during periods of regular rate movement. There hasn’t been much of that in recent years, with November seeing the first rate rise in a decade. It’s no coincidence that as a result of that move; remortgaging has since been very popular, with the latest figures showing double digit year on year rises.
This is partly because the fear of rising rates is often stronger than the fear of missing out on a cheaper variable deal – in what behavioural economists call ‘loss aversion’.
This psychology of economics can shape the market but what really matters to your clients is their own finances and what suits them best.
However, many will still ask you which is the ‘best mortgage’ right now. Giving –your clients a broad understanding of how mortgage rates work, can help them feel empowered about choosing the best deal for their needs.
Here’s a few ways you can keep things simple for your clients:
Put the Bank Base Rate in context
You could give them a short overview of the BBR, including the fact that the Monetary Policy Committee’s main aim is to keep inflation close to the government’s 2% target – it’s currently 2.5%.
Positive economic statistics – including wage growth figures published in April, suggest a rise could be on the cards soon.
The Bank of England has repeatedly said as much in recent months, noting in February that rates may have to rise earlier and by more than they thought at their last review in November but emphasising that any rises would be gradual and limited.
Never known high rates
Remember many of your first time buyer clients have come of age during a period of unprecedented low rates and may be totally unaware of just how high rates can go.
If they are not aware already, you could tell them about the 14% rates seen in the late eighties, or explain that since the Bank’s inception three centuries ago, short-term interest rates have averaged around 4.5%.
It’s useful if they can understand that the deep cuts to rates during the global financial crisis were intended to stimulate the economy but they won’t necessarily stay this low.
What affects mortgage rates?
You could also give a broad explanation of how the BBR affects lenders’ Standard Variable Rates, as well as trackers, and how fixed rates are impacted by swap rates.
This can feel like complicated stuff for some first time buyers, so if they don’t want complex information then it’s important not to overload them. As you already know, the BBR is just one of the factors that affect mortgage rates, albeit an important one.
This is why, even if there’s a quarter point rise in interest rates, it doesn’t necessarily mean an equivalent rise in mortgage rates – apart from on base rate trackers of course.
According to UK Finance (formerly the CML) mortgage pricing is affected by an individual lender’s cost of borrowing funds from savers, banks and wholesale market investors, the level of riskiness of their lending, the cost of holding the required level of capital and their lending targets.
What they should consider
Remind your clients that regardless of wider interest rates they should look at their own financial circumstances to help determine the best type of rate for them.
If they have no wiggle room in their budget and they can lock into an affordable rate it could be a wise move – but of course you can help them reach a decision.
It’s also worth explaining the risks of choosing a fixed rate, including what happens in the long term and their circumstances change. Borrowers may not have considered the costs of Early Repayment Charges and rely on you to give them the pros and costs of each type of rate, both now and if their circumstances change.
What will happen next?
Your clients will probably ask you what is going to happen next with interest rates, and you can’t give them a definitive answer.
The next rate decision is scheduled for 21st June and the Monetary Policy Committee is widely tipped to increase rates sooner rather than later. Watch this space…
For the use of mortgage intermediaries and other professionals only
If you do not have professional experience, you should not rely on the information contained in this communication. If you are a professional and you reproduce any part of the information contained in this communication, to be used with or to advise retail clients, you must ensure it conforms to the Financial Conduct Authority’s advising and selling rules. Halifax is a division of Bank of Scotland plc. Registered in Scotland No. SC327000. Registered Office: The Mound, Edinburgh EH1 1YZ. Bank of Scotland plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under registration number 169628. Information correct at May 2018.
