Lenders are starting to reassess fixed rate products as the industry braces itself for a rise in the base rate by the end of the year. Despite marking the end of historically low mortgage rates, industry experts are saying a rate increase could spell good news for both the property market and the mortgage industry.
Although some attractive headline rates are being dropped and replaced with less persuasive fixes, confidence in the market could be set for a boost if the base rate goes up as expected.
Kevin Duffy, managing director of Hamptons International Mortgages, believes a rate rise could help speed up the house-buying process.
This is because it could prompt more people to sell quickly and buyers may be less likely to hold back the sale through fear of the base rate going up even further before they secure a good rate on their mortgage.
Duffy said: ‘While in headline terms rate rises are unpopular, it can prompt a mortgage broker to make hay. Our activity levels are driven by vendor confidence. When rates start to rise, many procrastinating sellers take the view that buyer sentiment may lapse, so they react more nimbly to what their selling agent is advising them. This in turn brings more liquidity to the market.’
As headline rates disappear and it becomes less clear-cut for borrowers to secure the best deal, advisers could see an influx of business as confused borrowers flock to professionals for advice.
‘When there is some uncertainty or movement in the market, the need for professional advice heightens. Should a three-year rate be preferred over a five-year rate, for example? Are discount products now less appropriate? These are the kind of areas in which an experienced broker can demonstrate their value,’ added Duffy.
Jennifer Stoddart, spokesperson for Nationwide, agreed that an increase in the base rate could mean more business for advisers.
‘People are getting used to rates falling and it may take a slight increase to bring home the fact that rates can go up as well as down. An increase would definitely make customers think more carefully about products, as they may want to protect themselves against a rise. This may prompt more people to actively seek professional advice,’ she said.
The likelihood of a base rate rise is mounting. Libor rates have been increasing over recent months and a number of lenders, including Nationwide, have already taken the step to withdraw fixed rate products, replacing them with higher priced offerings.
Despite inevitable price rises, David Bitner, technical director at Bradford & Bingley, said customers will not be put off remortgaging and an unstable base rate could have a good outcome for the industry as a whole.
‘The effect of an increase in the base rate may be very positive for the industry. At the moment, anticipation of a rise is prompting more people to take a look at their finances and secure their mortgage onto one of the remaining fixed rate deals.
‘Volatility is always good for mortgage business, but not brilliant for customers as they prefer the stability of low fixed rate deals. Unfortunately, lenders can do nothing about the increases in fixed rate mortgages, as the cost of funding has already gone up. However, in our experience, fixed deals always remain popular with customers, even at a higher rate. So lenders will not lose out on new customers if the base rate goes up,’ he said.
Jason Clarke, spokesperson for Halifax, said a rate rise could also spark more product innovation as competition heats up among lenders to provide more than just a low rate.
‘An increase in the base rate could mean lenders will be faced with increased competition, so we would be likely to see a better variety of products as they try to make their range stand out. Products for first-time buyers is an area that the market as a whole needs to concentrate on. First-time buyers are struggling to get on the property ladder as it is, so if the base rate rises, it will become even harder. This means lenders will have to do more for first-time buyers when designing products,’ he said.
Although industry experts seem to agree that an increase in the base rate looks likely, Jon Round, head of mort- gage development at Norwich Union, said as long as it is short term, the market is unlikely to suffer.
‘The market needs long-term stability. There is definitely scope for the base rate to go up a little without damaging the market, as long as it is seen to form part of a reasonable pattern. It is only when we see sharp, frequent rises that we need to worry,’ he said.
Bitner believes if the base rate does increase, it will be unlikely to keep rising.
‘It all depends on when the next cycle of interest rates peak,’ said Bitner. ‘We may only see the base rate go up by 1.5% before it starts to go down again. The long-term trend for interest rates is on average lower that it ever used to be. We are not likely to see interest rates spiralling out of control, but a slight increase could spell good news for the market.’