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No quick fix for borrowers

Tracker products with no early redemption charges are the most popular mortgage deals so far this year due to the continued failure of lenders to offer competitive fixed rates.

Mortgage broker John Charcol says its top three mortgage deals this month are all trackers with no ERCs.

Lenders have failed to show an appetite for providing competitive fixed rates despite two-year swap rates having fallen to 4.82 per cent following December’s base rate reduction to 5.5 per cent.

Many lenders have chosen not to reduce their fixed rates in view of the high cost of lending in the last quarter of 2007. Several have also recently increased their tracker rates as the cost of funding remains high due to lack of liquidity in the market.

John Charcol technical manager Katie Tucker says: “The bank rate is widely expected to fall, so trackers or discounts make sense for most borrowers and one with no tie-in means you can remortgage when you like. Borrowers seem to be awaiting a new wave of sub-5 per cent fixed rates.

“However, another bank rate drop should give lenders sufficient confidence that the cost of their funds will remain low, allowing more of them to offer fixed rates under 5 per cent. The few lenders that have released sub-5 per cent two-year fixes, such as Bristol & West and Leeds, ran out of money in less than a week. This emphasises how vital it is for borrowers to move fast when a good deal does come up.”

Brentchase Financial Services mortgage specialist Mike Fitzgerald says the firm has seen a significant increase in the popularity of tracker products with no ERCs. “A lot of people are going for these products. I think the public have had enough of fees,” he says.

He says that many of the sub-5 per cent fixed rates in the market have a sizeable fee.

However, Fitzgerald also says: “Tracker rates have also been going up at a time when the perception is they should be going down. We have seen it with lenders such as Nationwide, Woolwich and Halifax.”

Last week, Nationwide said that it would be increasing its tracker rates by up to 0.15 per cent. Divisional director for mortgages Matthew Carter says: “The costs of funding remain high and we have found it necessary to follow other lenders who have increased their rates.”

Alliance & Leicester and Bank of Ireland also withdrew some of their tracker rates last week.

Fitzgerald believes the market will see a few more lenders decide to increase tracker rates by about 0.1 per cent. “This is a great time for lenders to get some profitability back,” he says.

John Charcol senior technical manager Ray Boulger says: “I expect tracker rates to go up due to the high funding costs at the moment. The cost of funds has lowered but there is still a shortage of liquidity in the market.”

Three-month Libor stands at 5.48 per cent, which signals the market’s belief that there will be a 0.25 per cent base rate cut soon.

The Mortgage Practitioner sole practitioner Danny Lovey says, in contrast to last year, banks can now make some money due to less aggressive pricing.

Boulger notes that the boot is on the other foot in the relationship between lenders and borrowers. “Lenders are now in the driving seat. They are able to increase rates to tone down demand. In the real world, a lender has got to make its pricing judgement. What price can it get away with? What level of volume can it service?”

Fitzgerald says Bristol & West had to increase the rate on its competitive two-year fixed rate recently due to high demand. “It had to put it up slightly but I do not think that was to do with funding issues but because it did not want it to affect its level of service.”

Chartwell Funding managing director Robert Winfield says the market needs one of the big lenders such as HBOS or Nationwide to come out and offer an eye-catching rate.

He says: “The fat-cat banks are filling their boots at the moment. We need one of the big boys to say this is enough and offer something good, otherwise no one else will follow.”

Boulger believes that tracker rates still look the best option in the current market but suggests that the industry might get to a situation soon where fixed rates start to look better.

He says: “A lot of people are expecting the bank rate to be cut to 5 per cent before the end of the year. The question is how far will the bank rate fall below 5 per cent? If this is unlikely to happen, then fixed rates will start to look attractive but if we have a sharp drop to 4 per cent, then it would be way too early to buy fixed rates.”

However, Boulger says prime borrowers are in a much better position than if the credit crunch had not happened. He says: “The bank rate would not have fallen so much without the credit crunch. It would probably have been still at 6 per cent.”


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Firm but fair

Technology has long had a symbiotic relationship with regulation. Many of the regulatory changes that we have seen in the last 20 years would have been almost impossible without technology. Take disclosure, for example.


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