Are better or worse things to come for the mortgage market and what are the opportunities for brokers?
Offering their view in this week’s Market Watch are:
Dominik Lipnicki, director of Your Mortgage Decisions
Rachel Springall, of Moneyfacts
Peter Vicary-Smith, chief executive at Which?
Dominik Lipnicki, director of Your Mortgage Decisions
After three blissful years of record low interest rates, the news that Halifax has hiked up its SVR and RBS has increased mortgage rates has unsettled many UK borrowers. Will the other high street lenders follow suit?
Halifax and RBS both said rates had to increase because the cost of their borrowings to fund mortgage commitments has gone up.
However, in reality there’s a much bigger reason behind the rise: they can get away with it.
These banks are aware of the widespread inertia in the mortgage market at the moment, as people are, on the one hand, complacent whilst they benefit from low borrowing rates, but on the other, convinced that new loans are nigh on impossible to secure.
Would RBS and Halifax risk rate hikes if they thought customers would pack up and leave them for a better deal elsewhere?
The answer is no, but that begs another very pressing question indeed. Will people vote with their feet in time to stop other lenders from raising their rates too?
Mortgage brokers need to ensure that borrowers take advantage of the competitive rates available to them now.
The media proliferation of stories about banks refusing to lend has convinced too many borrowers that remortgaging is not a realistic option and, until now, they have had little motivation to shop around.
It is our job to open their eyes to the possible savings they can make by switching providers instead of absorbing higher rates.
Advisers know that mortgage deals are still available to those with healthy credit ratings and equity in their homes; all we have to do now is convince everyone else.
Rachel Springall, of Moneyfacts
Borrowers who may be affected by the latest increase in their standard variable rate should review what the increases to their repayments may cost them.
Halifax’s decision to raise its SVR from 3.50% to 3.99% will cost borrowers £40.81 a month more in interest than previously, based on a £100,000 borrowing.
Although it may be tempting, borrowers should be wary of taking a direct offering from their current lender to switch to a fixed rate deal.
Consumers should instead shop around for a more competitive deal as rates as low as 2.54% for a two-year fixed rate mortgage are available.
With big players such as Halifax and Royal Bank of Scotland announcing increases in mortgage rates, it may lead the smaller mutual lenders to consider their current position.
It is unclear whether this will create a domino effect, with lenders increasing their SVRs; smaller mutuals may be less likely to be put in the spotlight as the larger names have already stepped forward.
Consumers’ confidence may now have taken a fall, as they could be under the impression that future variable rate increases may be less likely to rely solely on base rate changes, but more on the financial constraints of the lenders in the market.
However, this is still speculation until we see more providers altering their position.
It is still early days to assume that remortgage deals will now bear the brunt of increasing in cost to accommodate for customers moving away from a standard variable rate deal with their existing lender.
What will be interesting to see is what happens in the mortgage market over the coming weeks.
Peter Vicary-Smith, chief executive at Which?
At a time when people’s household budgets are already squeezed, providers increasing the standard variable rate (SVR) on mortgages will pile the pressure on thousands who have been relying on low base rates to keep their homes affordable.
An estimated 65% of mortgage balances are on variable rates.
All lenders will now be looking at their SVR and whether they can increase it. Borrowers will be hit hard, but lenders, in an uncompetitive market, know many people have no means to escape these rate hikes.
People have effectively become mortgage prisoners, because they are unable to move to a better deal with another provider. Only borrowers on the old Nationwide and Lloyds TSB SVRs of 2.5% have effective protection in their contracts, stopping the lender from putting up rates.
A significant barrier to affordable home-ownership is now the lack of competition in the market. The five largest mortgage providers account for around 75% of the market, compared to around half before the financial crisis.
The dominance of big lenders with increased margins means that mortgages are set to become more expensive while few lenders have any appetite to grow significantly.
We need to see the divestment of larger chunks of the state-owned banks to inject more competition.
Meanwhile, consumer confidence will be damaged by this hit to disposable incomes, which in turn will do little for economic recovery and further hamper the mortgage market.
Good quality mortgage advice will be vital for consumers who need to understand how they can weather this new squeeze.
