Some of the more unusual products to be launched in the past week or so are stepped tracker buy-to-let rates from The Mortgage Works. Historically, most stepped trackers tend to start with a ridiculously low pay rate. The residential stepped trackers typically appeared in the windows of high-street banks to lure prospective borrowers in. I doubt that many were actually sold once the borrower worked out that the ultra-low pay rate did not last for long before increasing sharply.
Buy-to-let stepped trackers tended to have very low initial costs for a different reason. The pay rate calculation always works best on a low rate, so having a low initial rate meant landlords could gear up and borrow as much
as possible in cases where the rental was a bit tight.
So why are TMW rates different? They actually get cheaper in the second year. The launch email from TMW says: “If your client believes the Bank of England base rate may increase in 2011/2012, then a TMW stepped
tracker could be of benefit to them, depending on their personal circumstances.”
In my mind, this is a rather tenuous link. No one knows when rates will go up and by how much. It could be that they start to rise in 2010, in which case the interest payments may be above the rental generated very quickly.
The cheapest overall rate is base plus 4.14 per cent in the first year and base plus 2.14 per cent in the second year. This is available to 60 per cent and has a whopping 3.5 per cent fee.
A 70 per cent version is 4.49 per cent over base for the first year and 2.49 per cent over the base rate for the second year. The fee is the same at 3.5 per cent.
There is also a second 70 per cent version which is 4.49 per cent over base for the first year and then 3.49 per cent over in the second year with a fee of just 2.5 per cent. So the two 70 per cent offerings end up costing the same, as one has a smaller fee that will be added to the pay rate.
TMW has a standard rental calculation of 125 per cent of 4.99 per cent, so the pay rate involved makes little difference as to how much the client can borrow. Unlike the other major buy-to-let lenders, TMW’s reversionary rate is not linked to the base rate but to a rate called “The Mortgage Works managed rate”, so this can increase even if the base rate does not.
It may also increase by more than the base rate when it goes up. In the current climate, this is important to remember as standard variable rates seem to be going up almost faster than UK national debt.
I was never a big fan of stepped products. What tended to happen was that no matter how long you spent with the client warning them their rate would rise sharply, they forgot. Subsequently, when their rate increased, you received an indignant phone call or email.
It will be interesting to see what happens with this product. Will clients contact us to say thank you when their pay rate drops? Somehow, I think not. It will be fascinating to see if there is any appetite for it. My guess is that demand will be limited.
Jonathan Cornell is head of communications for First Action Finance