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Fix up, look sharp

Headlines heralding 1p mortgages have kept the spotlight firmly on trackers in recent months but for many clients now is time to refocus on fixed deals.

The softening in conditions for fixed lending is shown by Legal & General’s recent mortgage purchase index, which analyses trends from thousands of mortgage applications made in the last quarter through L&G’s mortgage club.

Key findings for the first quarter of this year show the average two-year fixed rate was 4.78 per cent, down from 5.9 per cent in the final quarter last year , with the average three-year fixed rate down to 5.41 per cent from 6.3 per cent.

The figures also indicate that 72 per cent of residential borrowers chose a fixed rate compared with 65 per cent in Q4 2008, while 68 per cent of buy-to-let borrowers chose a fixed rate, compared with 43 per cent in Q4 2008.

Legal & General director of housing Stephen Smith says: “Fixed rates are very much back in favour, partly because lenders have been increasing the margins on their new tracker mortgages.”

However, as it stands, not all borrowers have access to the lowest deals.

Smith says: “Fixed-rate pricing has only really started to come down in the past few months, and even then only for those borrowers with a hefty deposit. The gap between what you would pay with a 40 per cent deposit compared with what you would pay with a 5 per cent deposit is still significant.”

In recent weeks, for example, the lowest fixed-rate mortgage someone with 10 per cent equity could get was 5.99 per cent with the Yorkshire Bank and for those with 25 per cent equity, 3.49 per cent with Alliance & Leicester.

Some movements in the market suggest things might be getting easier for those searching for a fix but with lower amounts of equity.

HSBC’s range of up to 75 per cent loan-to-value products launched on April 5 and includes a three-year fix at 3.99 per cent with a £599 fee.

HSBC head of mortgages Martijn van der Heijden says: “The message is clear, we are open for business and well placed to help borrowers. By widening our maximum LTV percentages to 75 per cent on some of our best-buy mortgages, more than two million more homeowners can now apply for them.”

But whether the trend of broadening access to deals will continue is uncertain, say brokers. London & Country Mortgage head of communications David Hollingworth says: “I do not see the current tiering of LTVs changing in the near future. What everyone is waiting for is the return of 90 per cent LTVs. But even if lenders come back with 90 per cent soon, probably only borrowers with squeaky clean credit records will be able to get them.”

The ongoing emphasis on equity levels is having a knock-on effect.

Smith highlights how advisers could be inadvertently creating challenging conditions for some borrowers by encouraging clients to overpay their mortgage wherever possible to lower their LTVs in the future.

Widespread overpayment has fed into the fall of average LTVs. L&G says levels have been consistently dropping, from 66 per cent in Q1 2008 to 58 per cent in Q1 2009, and this can leave brokers with an advice challenge. Smith says: “The challenge is trying to convince borrowers on standard variable rates to remortgage to a higher fixed rate to insure against the inevitable rate increases which the Bank of England will instigate at some point to combat the threat of inflation.

“This all understandably seems a very long way off for the average homeowner but it is worth thinking about.”

Of course, some borrowers, as well as market watchers, are not convinced that inflation is inevitable.

With the impact of quantitative easing proving so difficult to predict, even for some of the world’s finest economic thinkers, what hope might brokers have of convincing borrowers that it could be inflation, not deflation, they need to be concerned about and that many should be locking into a fix now?

Instead, it might prove easier to convince borrowers that rather than waiting to see if rates will fall further, they could be focusing on the wrong thing. The greatest risk to many borrowers’ ability to sustain their mortgage may not be the actual cost of borrowing but where their LTV levels will lie if house values fall further.

Hollingworth says: “I do not think fixes are going to get radically cheaper or more expensive in the short term – swap rates have been volatile but are swinging within the same range. Borrowers might be obsessing over 10 basis points here and there when what they should be more concerned about is that should house values fall, their LTV will rise and they will not have access to the deals they have now.”

Hollingworth says lenders are increasingly providing borrowers with three, four and five-year fixed rates. Activity on longer fixes tends to be muted but Hollingworth is clear that, for many, fixes are where the smart money lies.

John Charcol senior technical manager Ray Boulger said recently that he expects the price of fixed rates to start increasing as quantitative easing has not had the impact that many people expected. With some shorter-dated swap rates actually increasing in the immediate aftermath of the start of QE, Boulger expects fixed rates to start creeping up also.

He said: “After this month’s fall in the best fixed rates, it now looks like a good time to lock into one, ideally for at least five years.”

Fees might also prove a factor that advisers need to tackle when it comes to convincing borrowers reluctant to opt for fixed deals rather than stick with SVRs. As long as it is possible to get a well priced SVR with low arrangement costs, persuading borrowers it could be worth their while paying fees of up to £2,000 – not uncommon in the fixed market – could prove an uphill struggle.

But with over a million homeowners estimated to be on an SVR, there is clearly an advice opportunity for brokers to demonstrate to clients why they should lock in to good deals where they can get them.

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