Don’t automatically just think fixed rate.
Jeremy Duncombe is director of intermediary distribution at Accord Mortgages
During a recent meeting with an intermediary, one of our BDMs carried out a bit of a test.
At the end of the discussion with the broker, who looked set to opt for a fixed rate product for his customer, he borrowed the calculator, did the sums and quickly showed that choosing a variable rate product could save the customer more than £4,800 if rates remained static.
The customer was borrowing £500,000 on a repayment mortgage over 25 years at 75% LTV. Our 2-year year fixed rate was 1.86%, but the 2-year discounted SVR product had a payrate of 1.34%.
Assuming no base rate rise during the term, the customer would save £4,820 over the duration of the introductory deal once £250 cashback on the fixed rate deal is taken into account.
Assuming no base rate and subsequent SVR rise for two years is a significant ‘if’, of course, but then that’s a pretty significant chunk of money to potentially ignore too.
Even if rates rose by 0.25% in November 2018, again in March 2019 and in November 2019, then the customer would still save £410 over the discount period compared to the fixed rate.
The broker had understandably focused on delivering what their client asked for – a good value mortgage at a time when most people expect rates to rise soon – that they hadn’t taken a step back to think about whether they had considered all of the options.
Not all brokers are solely focused on fixed rates.
In the past few months we have seen a significant proportion of our business being written on our discounted SVR and tracker products, regardless of the expectations that the bank rate could increase.
On the flip side, across the group, we’ve also observed a rise in the number of homeowners opting for 5-year fixes compared to this time last year. For those that want complete security of knowing what their monthly repayments are, they clearly want to do this for the longer term.
It is important that all borrowers are using this time to review their options and plan ahead whatever the preferences.
Mortgage advisers have a vital role to play in helping borrowers to manage this process. By getting in early to proactively offer clients a mortgage review, brokers could save borrowers significant amounts of money over the longer term.
It looks unlikely that the bank rate will move in the immediate future but, regardless, that alone does not determine the pricing of loans.
Swap rates are also a key factor and it’s worth remembering that these have been pretty volatile over the past few months. Combined with November’s bank rate rise from the record-low 0.25%, a strengthening economy and the next anticipated upwards move, swaps turbulence has seen mortgage rates gradually rise over the past few months from their previously record-low rates.
Thinking ahead and acting early will help borrowers, brokers and lenders alike.
As well as protecting them from future swaps volatility and interest rate increases, it also gives clients a chance to get their home revalued and reassess whether their loan-to-value has decreased as a result of rising property prices.
This alone could help decrease their monthly repayments significantly.
It also has the benefit of helping to manage the flow of business for intermediaries. Heavy hints about rate rises, let alone actual increases, can massively increase application volumes.
But by acting before the spike in interest, brokers can smooth this demand, resulting in more manageable workloads and faster results for borrowers.
We know that these ultra-low rates won’t last forever, but that doesn’t mean doom and gloom for homeowners and it doesn’t mean they wouldn’t benefit from expert advice from their broker.
There are lessons to be learned here and early preparation can prevent unwelcome surprises. Intermediaries stepping in to educate borrowers can encourage them to take early action to protect themselves against rising rates – which is surely good news for everyone.
But don’t automatically just think fixed rate. Discounted or variable rates can, for the right customer, be a great alternative.
