Negative interest rates, in theory, should translate into cheaper mortgages, but as brokers know all too well central bank rate cuts aren’t always passed on to borrowers.
So what should borrowers do?
Should they fix now before rates rise much higher, pin their hopes on a tracker in case the base rate goes into negative territory, or avoid locking in to a new deal taking a punt that lenders will start cutting rates at the end of Q1 next year?
Negative interest talk
Since May, Bank of England governor Andrew Bailey and his team have made it known that negative interest rates are one option under consideration to support the country’s economic recovery and the central bank wrote to banks in October to check they were prepared should such a lever be pulled.
In the same month, UK Google searches of negative interest rates reached their peak according to stockbroker AJ Bell.
James Chisnall, managing director of City Finance Brokers, said: “I’ve had a handful of clients who have asked for advice around the potential of negative rates in the future and whether or not it would be worth taking the tracker route.
“Their thought process being that, if rates were to drop below zero, they could be in a lucrative position. By the time I’ve explained that since the crash in 2008 lenders now have a floor in variable rates which safeguards against this happening the majority have opted for fixed rates.”
Chisnall said that where he does build in flexibility to a recommendation, the advice is focussed on a client’s individual plans and aspirations over the coming years, rather than trying to “beat the market”.
October mortgage rate data from the Bank of England showed that average two-year fixed rates have climbed in all loan to value (LTV) brackets despite the base rate remaining static since they were cut to 0.1 per cent in March.
Rob Gill, managing director of Altura Mortgage Finance, said: “We’ve seen a number of clients who we provided indicative rates to over the last few months who have come back to us recently after finding a property only to be disappointed in how much rates have risen in the interim.
“They tend to understand the reasons why and that in the main they’re still securing very attractive rates and get on with it. Given how quickly rates have been moving up we’re seeing very little appetite to hold on to see if they come down again.”
High LTV challenges
Adrian Anderson, director of Anderson Harris, said the advice process had become “more challenging” now for borrowers who needed to choose from high LTV mortgage rates.
Since March, 95 per cent LTV deals rates have risen from 3.02 per cent to 4.90 per cent, 90 per cent deals have risen from 1.94 per cent to 3.55 per cent and 85 per cent deals have risen from 1.69 per cent to 2.97 per cent, according to the Bank of England.
Anderson said: “For first-time buyers and those who need higher rate LTV mortgages we are seeing more hesitancy to lock into longer-term rates because the rates are so much higher now and some borrowers think they may go back down again in the future.”
However, Anderson said there were very few penalty-free trackers available at high LTVs and the rates that were available were higher than fixed rates resulting in borrowers overpaying at the outset to have flexibility in case rates dropped in the future.
He added: “We need to be spending a long time talking to our clients about the benefits and drawbacks of all of the different options when advising on high LTV mortgages.”
Planning for flexibility
Rachel Dixon, of RH Dixon, said she saw multiple clients in October who wanted to take a rate that offered them some flexibility either in being able to leave early, or to repay large amounts of the balance. These borrowers, however, were planning for an event on the horizon rather than, as Chisnall puts it, “to beat the market”.
“One of my clients knew they were likely to receive a lump sum within six months of securing a new rate,” said Dixon.
“They planned to pay this off the mortgage which would mean their LTV would go down and they could switch to a better rate.”
Dixon likes Coventry Building Society’s Flexx for Term fixed rates which have a maximum 85 per cent LTV and no early repayment charges. The rate is higher than other comparative two year fixed deals at 3.55 per cent but borrowers can leave penalty free.
Dixon said she often uses Santander and Nationwide for penalty free trackers when her clients need flexibility.