Brokers report that mixed messages from the Monetary Policy Committee (MPC) are causing some borrowers to question if they should take out a variable rate mortgage now in case the base rate does fall.
However, after challenges from brokers over how their budget could cope with another rate rise and how far borrowers think rates will actually fall, only those with an excess of disposable income are taking the risk.
Peter Stamford, owner and lead adviser at Stamford Home Finance, said he has seen some take-up of variable rate mortgages recently, but only among affluent homeowners with low outgoings and a low loan to value (LTV) who would not be materially affected by a rate rise.
“The thinking is that the amount they’ll pay in the second year of the deal will outweigh what they’ll pay now,” he said.
He added: “I definitely wouldn’t recommend a variable rate to someone with tight affordability.”
In a blog published by the International Monetary Fund (IMF), it said the longer rates were kept high, the greater the likelihood that households will feel the pinch. The comments follow those of Bank of England governor Andrew Bailey who, after the MPC’s decision to hold the base rate at 5.25% last month, said that although the committee was not at the point where it could cut interest rates, “things are moving in the right direction”.
Catherine Mann, an external member of the rate-setting committee, voted to hold the base rate after previously voting consistently to raise it even when inflation was falling. City analysts, according to a report in The Times, took this as a sign that the MPC was eyeing a rate cut. After the meeting, financial markets priced in a greater chance that the bank would loosen policy at its next meeting in June. Mann, however, told Bloomberg TV that she thought the markets were pricing in too many cuts.
Mixed messages are confusing
The mixed messages, say brokers, are confusing for borrowers who read headlines of rate cuts on the way and are unsure whether to fix now or wait.
Jon Rawley, partner at Dart Mortgages, said: “When interest rates are expected to fall is the most common conversation I’m having with clients. They’re telling me it will be May or June and I’m having to challenge them over why they think that and how far they think rates will really fall.”
He added: “While I’d say that rates will be lower than they are now by the end of the year, I wouldn’t want to guess by how much they’d fall – it may not be very much at all.
“If they sit on a variable rate now, how long would they have to wait before they are quids in? We don’t know. You could just end up paying a premium.”
Rawley said he was having conversations about trackers and discounts, but clients needed to either have healthy disposable income or be undecided on their circumstances in the coming months for it to be a sensible decision.
The lowest rate for a two-year tracker is currently offered by Nationwide at 5.35%, while the cheapest discount deal, from Leek Building Society, is 5.36%, according to Moneyfacts. Fixed rates, however, are offering borrowers the chance to secure a deal starting with a four. Lloyds Bank is offering the cheapest two- and five-year fixes at 4.46% and 4.13% respectively. All deals are at 60% LTV.
Two-year fixes, say brokers, have risen once again in popularity and are now the most commonly asked-for deal.
Theo Makris, senior financial adviser at Everest Financial Advisors, says his clients are taking a longer-term outlook on falling rates.
“Most clients believe that mortgage rates will come down in the next 12-18 months, so at the moment, short-term fixed rates are popular.
“Those approaching a remortgage are facing such a big jump up in the cost of their monthly payment that most can’t afford for their interest rate to go up if the base rate rises again.”
Some more experienced homeowners were asking for comparisons with variable mortgages, but take-up was low.
“If tracker and discount rates were on a par with fixed rates, maybe it would be different, but they’re higher,” he added.
