Capped, CAT and extended tie in – mortgages that have lost their appeal.
Julia Harris, mortgage analyst at Moneyfacts.co.uk, commented: “As house prices continue to rise and buyers struggle to climb on to the housing ladder, the mortgage market has needed to become very dynamic. Today there are over 10,000 prime and non-conforming mortgages available, with a multitude of variations in lending criteria and deal types. As a consequence some mortgage products have gone out of vogue.
Capped products
“Six months ago capped rate deals had almost vanished, with only four products available compared with 38 on offer five years ago. As expected in a rising rate economy their popularity has grown, but still there are only 11 products to choose from, offered by Abbey, Coventry Building Society, Godiva Mortgages, Hinckley & Rugby Building Society, Kent Reliance Building Society, Marsden Building Society, Skipton Building Society and Woolwich.
“Deals range between two and five years, carrying arrangement fees between £495 and £999. With the capped rates sitting between 5.68% and 6.29%, the maximum rate is far in excess of many of today’s fixed rate deals. Additionally four of the products already pay the capped rate, while the other pay rates range between 0.10% and 0.44% lower than the cap. The average pay rate of these deals is currently 5.78%, already over half a percent higher than many tracker mortgages.
“While the pay rate of these capped rate deals remains relatively high, fixed rates deals will continue to offer a very creditable deal for those looking for protection against rate rises. Capped deals will come into their own if rates are expected to fall in the short term or in times of extreme uncertainty.
“Capped rates have lost their appeal; many people now seek protection against rate rises but at the same time demand the most competitive rate today. Many consumers’ finances are now so tight that they simply cannot afford to take on a higher interest rate with the hope of benefiting from any falls or take the risk of the rate rising to the capped level.
Extended tie in
“Extended tie in products were originally designed to offer borrowers low initial monthly repayments, at a time when expenses were stretching with moving costs and gave first-time buyers (FTB) time to settle into their new financial commitments. But the danger always was when the low deal rate finished and the higher ‘tie in’ rate was charged. Many may not have factored this into their financial plans, and often faced a nasty shock when their mortgage repayments rose sharply.
“Today only four low rate extended tie in products are available, paying an initial rate between 2.25% and 2.95% for a two year period, typically reverting to the SVR for an additional three to four years.
“Take the example of a FTB with a mortgage of £110,000, over 25 years. For the first two years their repayments on the 2.25% deal from Newcastle Building Society would be £479.74, but would then revert to a massive £801.48 – meaning the borrower would need to find an extra £321.74 a month.
“With increased regulation, it would be difficult to justify advising on these deals, especially when flexibility is key in many mortgage products and there are so many other ways to achieve lower monthly repayments. Options such as extending the mortgage term, repaying interest only or partial repayments can, if controlled and managed correctly, prove a more competitive deal in the longer term.
CAT standard
“First introduced in 1999, the CAT standard mortgage was never fully embraced within the mortgage market. Perhaps even back then the guidelines were too stringent to make it workable across the whole market.
“Today its guidelines are outdated, with only one sole surviving product qualifying. Perhaps the standard should be revamped, bringing it up to date with current market trends. There are still many features of such a mortgage, which could be recognised and rewarded for being ‘borrower friendly."
