Mortgage rates are going through a particularly unpredictable phase right now, as lenders deal with the aftermath of years of risky lending, which was criticised by the Financial Services Authority this week.
Some tracker rates have been rising at a time when it is logical to expect them to fall. Fixed rates, meanwhile, have been coming down, but not by as much as expected. Lenders struggling with funding shortages have withdrawn deals or increased rates to deliberately unaffordable levels to scare off new borrowers.
This unpredictability means that while there are still a few attractive rates around for “average joe” mortgage borrowers, brokers say that even the mainstream market has become more complicated, making it harder to find the best rates.
Jonathan Cornell, of Hamptons Mortgages, the broker, says: “For the majority of borrowers, it is still business as usual. Tightened criteria are likely to affect a small number. Joe Average can still find good mortgage deals, if he looks hard enough.”
The problem is that not all mortgage lenders are offering good deals, even to Mr and Mrs Average.
Advertisement
Melanie Bien, of Savills Private Finance, another broker, says: “The current situation is unusual in that, while the Bank of England reduced the base rate by a quarter of a point in December, lenders – including Nationwide, Alliance & Leicester and Halifax – have increased their trackers. Fixed rates have fallen, but not by as much as you would expect.”
The credit crunch is behind the relative costliness of these deals. As lenders struggle to borrow money to fund new mortgages, there is less choice and rates are higher than expected, given the base rate.
Banks and building societies are dividing into two camps: those that can afford to offer good rates and those that can’t. This is because some are more exposed than others to the drain on liquidity.
Banks and building societies that use interbank funding frequently, such as Alliance & Leicester and Bradford & Bingley, are struggling to feature among the best buys, whereas those that rely more on savers’ deposits should, in theory, be in a better position to offer competitive deals.
In the latter camp are small building societies, as well as HSBC, which owns First Direct. HSBC currently has the only two deals below 5 per cent in our best-buy tables.
Advertisement
Halifax and Nationwide sit somewhere in between – funded through both “securitisation” and savers’ deposits, meaning that they can still offer reasonably competitive deals, though probably not the best.
Rob Clifford, chief executive of Mortgageforce, another broker, says: “The problem is whether lenders who rely on wholesale funding can lend at all, let alone offer good deals.
“They will have little or no new capital to lend this year as securitisation has dried up. In contrast, it is a good time for lenders who are not reliant on wholesale funding to develop attractive products and grab market share.”
Alternatively, some brokers say that the lenders that do not rely on wholesale funding might try to take advantage of the lack of competition in the market and attempt to boost profits rather than cut rates.
Brokers are directing their customers to tracker deals to take advantage of anticipated falls in the base rate that could come as early as this month, but there are still some excellent fixed rates to be had.
Advertisement
Ms Bien says: “A tracker may prove a better option than a fix, even though lenders have been increasing their trackers. But watch out for really competitive fixed rates: there have been some excellent ones worth grabbing.”
First Direct has a two-year fix at 4.75 per cent, with a £1,498 fee and offset facilities. The best tracker comes from the Cooperative Bank, pegged at 0.01 percentage points below base rate for two years, with a £999 fee, giving a current rate of 5.49 per cent.
For the tracker to be better value than the fix, there would need to be two quarter-point reductions in the base rate. The next best two-year fix is 5.05 per cent, from Leeds Building Society, while the next best tracker is Hanley Economic Building Society’s two-year deal at 5.35 per cent with a £799 fee.
However, great rates are not hanging around for long, so it is important to move quickly.
Ms Bien says: “Some deals are being pulled within days.
Advertisement
Halifax launched and pulled one attractive range within three days, while Bristol & West pulled a range of fixes days after launching them because of the high levels of interest.”
CASE STUDY HOPING TO TRACK FALLING RATES
FOR the past 12 years Tim Ross, 39, has taken out fixed-rate mortgages. But when he came to remortgage this time, he broke his habit by choosing a two-year tracker from the Cooperative Bank, pegged at 0.01 per cent below the Bank of England base rate. He took out the loan in the hope of base-rate cuts this year.
Mr Ross, an estate agent who lives with his wife and three children in Surrey, says: “I had filled out all the forms to take out another fixed rate, but given everything that is going on at the moment, I changed my mind at the last minute.”