- No change as expected on either Bank Rate or the size of QE
- Popularity of 5 year fixed rates surges as rates plumb all time lows
“Although only one lender, Lloyds Banking Group, has so far confirmed it has drawn down funds from the Funding for Lending Scheme (FLS) the Bank of England has confirmed that as of 24 Sept 13 lenders had signed up to the scheme and certified their base stock of loans at 30/6/12. Many other lenders have applications for participation in the scheme at various stages but it is a lengthy process, with the application form making an ordinary mortgage application form look likes child’s play, despite lenders now requiring much more information before approving a mortgage application than was needed prior to the credit crunch.
“Furthermore, some smaller lenders have not previously made a securitisation issue and as the Bank of England requires collateral in this form a further delay is built into the process to allow the relevant legal processes to be completed for a new securitisation programme. In addition, prior to allowing funds to be drawn down the Bank of England is undertaking its own due diligence on the quality of the security lenders are offering and their processes for underwriting new business. It is very understandable the Bank is not prepared to rely on information provided by the credit rating agencies but maybe a little surprising it is not prepared to rely on information from the FSA!
“Despite very limited FLS draw downs so far the scheme is already having a significant impact on the cost of funds and this has been reflected in progressively lower mortgage rates since the scheme was announced as a result, particularly on fixed rates. At its current level of 0.57% 3m Libor is just over 0.5% lower than when FLS was announced, and swap rates are at all times lows, with 2 year swaps at 0.71% and 5 year at 1.01%.
“The knowledge that FLS is available also appears to have impacted on many lenders’ appetites for new lending, even before they draw down funds. This, coupled with strong indications from the Bank of England of flexibility in some of its previous over zealous regulatory requirements, in areas such as liquidity and the timing of implementation of Basle 3, has improved the lending appetite of some lenders, resulting in some increase in competition, which of course in itself also helps to improve pricing.
“Figures reported by the Bank of England and the CML are somewhat historic because they are based on completions, which, for purchases, take on average about 3 months from application. This is particularly relevant in a rapidly moving market when reporting average interest rates on new mortgages. Therefore expect to see these average reported rates falling steadily over the rest of this year, simply to reflect recent rate reductions.
What Should Borrowers do now?
“There is very little difference between the best rates on 2, 3 and 5 year fixes, although longer term fixes are significantly more expensive. Furthermore, if one takes a 2 year fix and factors in additional fees to refinance in 2 years time the difference becomes even smaller and in some cases disappears. Therefore we believe that in general 5 year fixes continue to offer the best value for those wanting a fixed rate mortgage, providing that having early repayment charges (ERCs) for 5 years is not expected to be a problem.
“However, for those who don’t want to be locked into ERCs for 5 years the best 2 and 3 year fixed rates are cheaper than most new tracker and discount mortgages. This is particularly relevant for anyone planning to move within 5 years as, despite most mortgages being portable in theory, lenders require borrowers to meet their criteria at the time of moving, even if they don’t want to increase their mortgage or want to reduce it. In the current market this results in many bear traps, particularly for older borrowers because of lenders’ generally jaundiced view on lending to this category of borrower, despite the low LTVs required by many such borrowers and the abolition of a statutory retirement age.
“Our advice heavily influences the deals our clients choose and after relatively little change on the split of deals in the first seven months of this year the last two months have seen a sharp increase in the take up of fixed rates, particularly 5 year fixes, including hybrid tracker/fixed rate mortgages. As the premium one has to pay for a fixed rate compared to a tracker or discount rate at the same LTV has narrowed, and in some cases gone negative, with only a tiny possible benefit on lower tracker rates from any further Bank Rate cuts, the attractions of a fixed rate mortgage have clearly increased, despite the probability of no increase in Bank Rate for several years.
“In the first seven months of this year 51.5% of our residential mortgage clients choose a variable rate and 20% a 5 year fixed rate. In August the proportion opting for a variable rate fell to 47.6% and in September it fell further to 39.8%. 2 year fixed rates were the most popular fixed rate term earlier in the year but 5 year fixes have now taken the top spot. In August the proportion of John Charcol clients choosing a 5 year fix increased to 24.3%, the same figure as for 2 year fixes, but in September there was a sharp increase in 5 year fixed rate/hybrid take up to 30.4%, with 2 year fixes falling back to 25%. The comparable figures for the proportion of clients choosing a 5 year fixed rate in earlier years are 17% in 2011 and only 5.7% in 2010.
“To meet the increased demand for some longer term security but also reflect the fact that a Bank Rate increase now looks even further away John Charcol has just launched an exclusive 5 year hybrid mortgage funded by Accord. The only lenders offering a hybrid mortgage (tracker, reverting to fix) are Yorkshire Building Society Group lenders, including Accord, plus Woolwich. Prior to the launch of our exclusive all hybrid deals were on a tracker rate for two years, reverting to a 3 year fix. However, it now appears likely Bank Rate will remain at 0.5% for at least 3 years and so an extra year on the initial lower tracker rate looks attractive, which is exactly what our new mortgage offers, without increasing the subsequent fixed rate.
“This exclusive 5 year hybrid mortgage is available up to 75% LTV and is at Bank Rate + 2.49% to 30/11/15, reverting to a fixed rate of 3.79% for the next two years, with an arrangement fee of £1,495. If Bank Rate remains at 0.5% for the next three years this results in an average rate of 3.31%, which for LTVs up to 75% would make it comfortably the market leading rate. The cheapest normal 5 year fixed rate up to 75% LTV is also from Accord at 3.49%, with a fee of £1,995.
