View more on these topics

Borrowers in a fix

Tanya Powley writes on the dilemmas facing homeowners coming off attractive two-year fixed rates.

Dynamite two-year fixed deals taken out in 2005 could see more than a million borrowers facing rises of up to 30 per cent in their repayments when the deals come to an end.

A report by Credit Suisse says over £200bn in fixed-rate mortgages were written in 2005, representing about 20 per cent of the outstanding UK mortgage market.

Homeowners approaching the end of two-year deals, often as low as 4.49 per cent, will face a shock when they are shifted on to standard variable rates which could be as high as 7.5 per cent.

Fixed deals looked cheap in the second half of 2005 after the Bank of England’s decision to cut base rate to 4.5 per cent in August.

Council of Mortgage Lenders’ figures for 2005 show more than twice the number of borrowers (427,400) took out fixed rates in the fourth quarter compared with the first quarter (202,200).

Brentchase Financial Services managing director Mike Fitzgerald believes the economy will be affected and arrears will increase.

The Credit Suisse report highlights the fact that rising interest rates from November 2003 onwards led to higher arrears across the industry in 2005, relating partly to variable-rate loans repricing upward. It warns that the industry might be entering a similar phase as two-year fixed deals come to an end.

The report says: “Over the last few years, arrears have responded far more sharply to moves in two-year fixed-rate mortgage rates than base rate itself, driven in part by the less dynamic nature of fixed-rate payments and the fact that more and more people are on fixed rates.”

Mortgageforce managing director Rob Clifford says it is a big issue because it affects so many people. He says: “Some deals were as low as 3.99 per cent while 4.5 per cent was the most typical rate. If you take it to the ultimate conclusion, if you go on to a 7.5 per cent SVR on a £150,000 mortgage, your payments will see more than a 50 per cent increase.”

The Mortgage Practitioner sole practitioner Danny Lovey says borrowers are set for a lot of pain. He says: “I have got bucketloads of these cases, with people now coming to the end of the life of their mortgage. Halifax was doing these absolutely spiffing deals in the second half of 2005 so I put a lot of my clients with them.

“We will be aiming to do a lot of remortgaging. Anyone who does not remortgage will go on to SVRs and see their rate go from 4.5 to 7.5 per cent. But the pain will be there, no matter what option they decide to take.”

John Charcol senior technical director Ray Boulger says arrears will rise but he does not believe it will be dramatic. He says: “We need to remember that people’s salaries have risen quite a bit since 2005. It will really depend on how heavily people were in debt when they applied for the mortgage. Those will be the people to struggle the most.”

On a positive note, he points out that homeowners will have seen their property increase in value, generally by around 10 per cent, which will give them some choices.

Boulger says there are a number of things borrowers can do to escape going into arrears. He says: “People can take out a mortgage with a higher arrangement fee and add the fee to the mortgage. They could also increase their mortgage by a modest amount and get a flexible mortgage or increase the term of the mortgage. It is much better to do one of these things than go into arrears and get a poor payment history.”

Clifford says: “The issue is serious but the reassuring thing is that there is no shortage of good products. In theory, you would expect arrears to occur but, in practice, the homeowner will get a rate from their lender. I think the problem is definitely containable.”

Fitzgerald says brokers need to be proactive and make sure their clients know their options. He says: “We are getting phone calls left, right and centre from people who are coming off fixed rates. There are some good deals around at the moment. GMAC-RFC is offering a mainstream two-year fix at 5.45 per cent which is great.”

But Lovey says lenders have begun withdrawing their fixed rates over the last few weeks as swap rates continue to rise. He says: “Fixed rates are being pulled rapidly so we will be seeing new higher fixes being put in their place. We will be looking at making sure people can afford what is out there. We will probably have to extend some people’s mortgages as we do not want them going into arrears.”

Recommended

Insurers failing to explain critical changes

Advisers say very few providers have contacted them to explain the Association of British Insurers’ new critical-illness insurance definitions and how they affect their products.ABI protection committee chairman Nick Kirwan says there are lots of advisers who have approached him, since his speech at Money Marketing Live last month, complaining about providers that have left […]

Guidance needed from FSA after menu

Like most other industry colleagues, I have read with interest some of the assorted coverage of the FSA’s forced U-turn on the payment menu and IDD and I have been surprised at the number of what appear to be quite inaccurate observations on the subject. For example, David Severn is quoted as describing it as […]

Back to basics

Generic advice needs to concentrate on teaching financial skills rather than product recommendations.

Standard adds fund diversity to platform

Standard Life is increasing its exposure to the alternative arena with the addition of eight funds to its life and pension platform.The funds come from five providers and include three recently launched vehicles from specialist investment banking firm Macquarie Bank.The move is part of a strategic alliance between Standard Life and Macquarie that operates until […]

Phone - thumbnail

Pension Wise — now taking calls…

Those with decent-length memories will recall that in the 2014 Budget statement George Osborne announced the new (and entirely unexpected) pension freedoms. The new rules come fully into force in less than two weeks.

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com