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‘I’d be wary of recommending five-year fixes despite the gloom’ – Star Letter 05/08/2022

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  • 05/08/2022
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‘I’d be wary of recommending five-year fixes despite the gloom’ – Star Letter 05/08/2022
Each week Mortgage Solutions and its sister title, Specialist Lending Solutions, pick the top comments from our readers.

The first was from Sox, under the article: Base rate rise will intensify conveyancing workload and logjams – reaction

He said: “Poor conveyancers who usually work a strict 9-5 Monday Friday, welcome to the brokers’ world. We’ve worked 12-hour days, seven days a week for three years now. This is the third summer in a row I will take minimum holiday and miss time spent with my family. But when we are all scratching around for business this time next year, we will be glad we ‘made hay while the sun shone’. 

“Of course, the lenders’ rates can’t be sustained and I’d be wary of recommending five-year fixes despite the doom and gloom, because these volumes won’t continue once the real impact of cost-of-living feeds through.” 

 

Competition to return soon 

Sox continued: “At present due to capacity, any lender left with the lowest rate is inundated with business and with half the staff on summer holidays they can’t afford to be the lowest rate in the market for long, so have no choice to price upwards, then the next lender is the lowest rate in the market, and so on.  

“However fast forward 12 months and we will see levels dip and then banks – who still need to make profit – will have to start competing with each other again to try and win market share. 

“My prediction would be rates back at the level they are today in 12-18 months, and then possibly lower after that. So be careful about locking people into long-term high fixes at what could turn out to be almost the peak in the market.” 

 

Stress test removal is ‘short-sighted’ 

The next article to garner reactions was: Lenders in no rush to scrap Bank of England’s stress test

Arron said: “Lenders are right.” 

Andy Wilson added: “It seems rather short-sighted to scrap a stress test which sought to prevent borrowers from taking on too much in case interest rates went up – as they are now doing, and will continue to do so. 

“Many younger homeowners have not seen interest rates above four per cent, and many have been able to secure mortgages at half that rate. These are certainly not the levels that older homeowners will have seen over the last 20 years or so. 

“There is no cap on how high mortgage rates can go, either. The last time we saw caps, base mortgage rates were in double figures. 

“Whilst other measures introduced in recent years have arguably had more restrictive effects on the ability to borrow, I support the lenders not immediately removing the stress test.” 

 

Equity release misconceptions 

Wilson also weighed in on the story: Over two thirds of equity release customers research prior to seeking advice – Standard Life Home Finance

He said: “Thank goodness equity release cannot be arranged on a non-advised basis. 

“The levels of misconceptions, misinformation and downright dangerous pre-conceived ideas is alarming, but not unexpected. We still have a legacy of the past where products were unregulated, inflexible, expensive and often mis-sold. A third of respondents ‘relied on information from family and friends’ – they might as well have asked a bloke from down the pub, for all the accurate information most families are able to provide.” 

He added: “It is more reassuring to note that 97 per cent of respondents felt they understood equity release after speaking to an adviser, and that they understood alternative options. This is probably why there are so few complaints about modern equity release plans; they are being arranged based on a proper advice process from largely ethical and conscientious advisers.” 

 

Worrying lump sum equity release trend 

The last article to get a response was: Equity release lending hits fresh high of £1.6bn in Q2

Again, Wilson reacted, saying: “The significant increase in the number of homeowners taking lump sums in just a year is a little disturbing. In my own work, the reverse is true. 

“Unless there is a specific need to take a one-off lump sum – such as repaying an existing interest-only conventional mortgage or gifting to family – most borrowers may be better served by a ‘drawdown’ plan. This allows a gradual release of the loan, meaning that compounded interest is delayed until the sums are actually taken. This can have a profound effect on the final debt when the borrowers die, or the property is sold. 

“One of the biggest criticisms of equity release lifetime mortgages is the effects of compounding interest. Drip-feeding the loan in this way proves this situation.” 

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