Andrew Frankish examines the current spate of new fixed rate mortgages launched into the market
With the General Election firmly out of the way, the mortgage market has come out of its brief period of reflection and is looking at ways to generate new business.
Happily for borrowers, this event has coincided with a reduction in long-term interest rate figures over the past few weeks. The result is the launch of a raft of new fixed rate mortgage products as lenders seek to exploit the availability of cheaper funds on the money markets and clamour to compete for new business.
Highly competitive
The UK market has always been highly competitive for fixed rate mortgage products. As such, lenders are anxious to leverage whatever sales they can with a view to gaining market share at each other’s expense.
The hope is that, longer term, the borrower will remain with that lender at which point any so-called ‘loss-leader’ product will start to recoup revenue for the provider.
At the moment, this very aggressive market is resulting in some excellent deals where longer-term fixed rate products are available at interest rates similar, or only slightly above, their shorter-term counterparts.
Read into that what you will but the general inference is that the market is expecting rates to have peaked in the medium-term and perhaps even to head lower over the next couple of years.
Product similarity
One prime example of this phenomenon is the similarity in two and five-year fixed rate deals with the Alliance & Leicester which is offering 4.86 per cent over two years and just 4.99 per cent over five years.
Clearly, this strategy is designed to try and tempt customers into being tied into the lender for a longer period of time which helps it recoup its initial costs in attracting the borrower in the first place.
From a customer’s perspective, fixed rates are also attractive. Borro-wers generally like to have some certainly as to their monthly commitments and fixed rates give them the opportunity to budget for a reasonable period into the future.
Whereas with discounted or other similar products, homeowners are always at the peril of interest rate fluctuations; at least with a decent fixed rate, they can relax in the knowledge that they can allocate a specific proportion of their budget to their mortgage repayments and that this will not vary for the duration of the agreed term.
Responding lenders
Another argument in favour of the fixed rate product is that the lenders are merely responding to what the market wants. There is some truth in this analysis as borrowers generally look for certainty as to future repayments over and above the short-term saving of every last penny on their monthly repayments.
Furthermore, in times of rising interest rates – as we have seen over the last year or so – borrowers tend to seek safety in fixed rates.
In addition, fixed rates are popular with borrowers who need to stretch their incomes to achieve their desired property.
They enable these borrowers to avoid the shock of a hike in their mortgage repayments should rates head north. Indeed, because of this, many lenders allow borrowers on longer-term fixed rates to take on larger income multiples than they would otherwise be entitled to.
The logic is that, while their repayments will be fixed for a lengthy period, it is expected that their income will increase over time, providing the borrower with a greater financial cushion, as the mortgage term progresses.
First-timers
Of course, fixed rate products will always be popular with cautious clients and especially first-time buyers entering the housing market. If the government’s latest plans for shared ownership in the property market can encourage more first-time buyers into the fray, this could well cause a further increase in the popularity of fixed rate products, helping clients to budget for the affordability of their monthly mortgage payments combined with the rent for their shared ownership property.
Commenting on the market in general, lenders’ fixed rates have reduced again recently by around 0.15 per cent to 0.20 per cent and the discrepancy between tracker/discounted rate deals and fixed rate mortgages has reduced to around 0.1 per cent in some cases.
For example, Nationwide Building Society has a two-year tracker at 4.99 per cent and a two-year fixed at 5.09 per cent, implying again that lenders see a significant rise in interest rates as unlikely over the next couple of years.
All in all therefore, this can only be good news for consumers. When asked by brokers whether they will happily trade a few pounds potential saving per month in favour of certain costs over the next few years, the vast majority of borrowers prefer to choose certainty.
And it’s no surprise; with five rate rises over as many months still firmly in most borrowers’ memories, the last thing that most people want is the possibility of another hike in mortgage repayments, no matter how remote the industry believes that to be.
Andrew Frankish is managing director of Mortgage Talk
