The stark warning comes from Ray Boulger, senior technical director at John Charcol who says that although the number of brokers putting borrowers on 2-year deals for the wrong reasons has gone down since before the credit crunch there is still a minority putting their own desire for proc fees ahead of putting the client on the right deal.
In Boulger’s view, there are very few instances, given current market conditions, that a 2-year fixed or tracker rate would make more sense for the borrower than a lifetime tracker.
He said: “I accept that different brokers will have different views on where the market is and when interest rates will go up and that affects the type of deal you’d recommend. But I can think of very few reasons why you’d put a borrower on a 2-year tracker rate now rather than a lifetime tracker rate with a 2-year early repayment charge (ERC) period.
“The lifetime deals offer the borrower much more flexibility and choice after two years, provided there are no ERCs after that. Whereas those on a two year deal may not get such a good rate when they need to remortgage in 2012, when interest rates will probably have gone up.”
He said the argument that a borrower wants the comfort of a fixed rate and doesn’t believe interest rates will rise over the next two years is a bad one, though he admitted there could be circumstances where a 2-year deal made sense.
“Where it becomes a problem is when the broker recommends the deal for the wrong reasons. It’s a small minority of brokers who are still doing this, but we do need to be conscious of it.”
On average lifetime trackers are priced around 20 to 25 basis points higher than a 2-year tracker, and on many the ERCs are lower. The Woolwich ERC on their lifetime tracker is just 1% for the first two years, which Boulger says gives borrowers the ability to continue on a good tracker rate for longer than two years if appropriate, or switch.
He added: “I find it hard to see how a 2-year deal can be good value for the client, particularly if they have reasonable equity.”
Saffron building society has recently withdrawn its lifetime tracker, which offered an 85% LTV, replacing it with a 2-year tracker rate, which Boulger said was “disappointing”.
Vince Sammon, director of Sammon Mortgage Management, a mortgage broker, agrees with Boulger.
He said: “The product term should always meet the client’s needs and circumstances. Longer term fixed and tracker rates should be considered unless a client particularly needs flexibility after say two years. Most longer term fixed and tracker rates will carry ERCs for at least this period hence may be too restrictive for some clients.”
But Graham Swann, director of Halifax-based broker Mortgage Innovation, said he slightly disagreed with Boulger.
He said: “Tracker rates are quite high compared to Bank base rate at the moment. I understand what Ray’s saying, but I think considering where the base rate’s heading it wouldn’t be suitable for most of our clients. The two-year rates are better priced. Until lenders start relaxing rates at the 85% LTV plus range, for most of the borrowers we see it just doesn’t make sense.”
