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Fight for the prize

by: David Finlay
  • 05/07/2010
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As fixed rates and trackers bob and weave for dominance in the market, David Finlay takes a look at the form of the contenders

It is a heavyweight clash of epic proportions. Like prize fighters, fixed rates and tracker deals continue to slug it out in the market. The contrast in styles is evident. The fixed rate: a solid methodical and consistent worker, one from which you know exactly what kind of performance you will get month in month out. The tracker: a little more elusive, some might say more enigmatic, and more of a showman, with the ability to string some highly successful results together, but also prone to the odd lapse that could prove costly.

There are valid arguments in each corner about which would prove the winner in the current market conditions, but pundits are also fully aware that it only takes one solid blow to decide this fractious contest. That blow could come in the form of an interest rate rise, but the question remains is this likely in the current financial environment?

As we wait for July’s base rate decision, we can only reflect on the June decision by the Monetary Policy Committee (MPC) to continue holding the interest rate at 0.5%. Inflation, as measured by the Retail Prices Index, stood at more than 5%, the highest for nearly 20 years. Bank of England governor Mervyn King had to write a letter to the Chancellor explaining why inflation is so high, but the MPC has made it plain that it does not envisage tightening fiscal policy for some time yet. The committee is keen for the government to begin cutting the public debt and is willing to keep interest rates low to support this.

I am concerned about the outlook for growth in the eurozone, with worrying levels of public debt in some countries, with recent financial market turbulence yet another reason for policy caution. All these variables added up to a hold in Bank base rate (BBR) and the immediate future shows little sign of change, although quite surprisingly the minutes from June’s MPC show one member voted in favour of increasing the BBR by 0.25%.

So while the shadow of a potential interest rate rise continues to loom in the distance, there are some general rules of thumb for consumers to follow. They may seem like common sense, and they are, but they still need reiterating. If a borrower thinks the base rate will stay low and is happy with the risks attached if base rate unexpectedly increases, then they should get a tracker deal. If they think the base rate is going to go up, they should buy a long-term fixed.

It may not be worth buying a short-term fixed as it will cost more today and it could revert to a variable rate just as the base rate is increasing. If the low two-year fixed rates in the market are just too tempting, borrowers need to make sure that they buy one with a good follow-on rate.

For those looking to borrow at a higher LTV, a fixed rate provides the greatest certainty as base rate will eventually go up, so it inevitably provides the peace of mind that goes with it.

According to the CML, between 40% and 80% of mortgages have historically been fixed-rate deals. There is a core of consumers, in the region of 40%, who always buy a fixed rate and around 40% who are indifferent and choose a fixed rate when they expect rates to go up and opt for a variable rate when they expect rates to fall or stay the same.

In the current market, there are a lot of accidental variable rate consumers. These are the borrowers who bought a fixed rate prior to the credit crunch and have since moved onto their lenders SVR or follow on rate. Some of these variable rates are so low that borrowers find it hard to justify paying a significant premium for a fixed rate, even if they fall into the 40% of consumers who invariably opt for a fixed. Others are effectively stuck on a variable rate because their LTV is too high to allow them to remortgage onto a fixed rate alternative product.

When analysing this area of the market it is also wise to look at the availability of such products. Indeed, according to Mortgage Brain’s latest Monthly Product Analysis, the number of mortgage schemes available to brokers has climbed to its highest level in over 18 months. The total number of live mortgage schemes listed on its mortgage sourcing system increased by 22% in May. Current figures, as of 31 May 2010, list 5805 products, up from 4753 on 5 May 2010 and bring the number of live mortgage schemes available to its highest level since November 2008, when figures stood at 6899.

The latest figures represent a 103% increase in overall product availability compared to this time 12 months ago. A hat trick of increases was also seen during May for the industry’s three main product types – fixed, tracker and variable. Fixed rate products and trackers witnessed the biggest movements during the past month with fixed rate products now representing 3612 of all available products, up 24% from 2292 as of 5 May 2010.

Trackers also climbed 24% during May with current figures listing 1767, up from 1423. Variable rate products rose for the sixth month in a row by 4% and now represent 426 of all available products – up from 409 as of 5 May 2010.

It is inevitable that the base rate will increase, and this will drive a lot of consumers to switch to a fixed rate deal. But inevitably the markets will have already factored this rise into swap rates (used to fund fixed-rate mortgages) previously. This means that those borrowers who may be looking at fixing after an interest rate rise could have left it too late and missed out on the better deals. Obviously, this adds another layer of confusion onto when exactly is the best time to fix. There is evidence that the market will continue to improve and even more good value fixed rates will become available both for the low LTV ‘wait and see’ borrowers and increasingly for higher LTV borrowers who currently have limited access to fixed rates.

Of course, while it is good that competition and low swap rates are driving better deals, advising on such decisions remains a tricky one. Brokers need to take into account their clients’ attitude to risk when looking at such deals.

The client meeting should bring about some searching questions involving attitudes to risk, personal circumstances and aspirations. There are also low SVR levels and a lack of available borrowing options to consider especially for those with an impaired credit profile to take into account. However, the time could be right to assess the merits of a fixed rate deal and it could well be any lingering post election or emergency Budget uncertainty that will continue to drive this element of the market.

Predicting the future is difficult enough and this is certainly an area of the market that could see a number of swings through any economic uncertainty, market confidence and rate-rise rumours. Brokers will have to continue assessing their clients’ needs on an individual basis and advise accordingly. There is no stock answer to the question of ‘to fix or not to fix’, and it will be brokers’ expertise and experience that will provide the necessary options from which clients can settle on the right deal for them now and in the future.

David Finlay, intermediary business director for Barclays

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