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Shock treatment

There is good news and bad news for the housing market. The good news is that – for the time being at least – it looks as though interest rates are not going to climb any higher although, admittedly, rates could still go up if the liquidity crisis continues and the rate at which banks borrow money remains high. The bad news is that, despite the good news, affordability has reached new lows.

According to the Royal Institution of Chartered Surveyors, mortgage payments are making up the biggest share of take-home pay for 17 years because house prices have risen three times faster than salaries in the past decade. First-time buyers now spend nearly five times more than they did a decade ago.

It is not just first-time buyers who are affected. Homeowners who overstretched themselves when they took out cheap two-year fixes may find themselves moving from a rate of around 4 per cent to around 6 per cent, which means a big rise in mortgage costs. The payment shock could cause problems. The industry, and brokers in particular, should be honing their strategies for dealing with this situation. Brokers need to ensure they are giving clients the right advice and helping ease the pain in what could be a difficult time.

The key is keeping clients fully informed and warning them well before the event. Moving on to a higher fix will be payment shock enough without the client being forced to languish on the lender’s standard variable rate in the interim. Clients should be made aware of the situation and then advised as to what they should do next.

Thankfully, there are several options available to homeowners. Variable rates are still cheaper than fixes. For example, Halifax has an excellent tracker at 0.36 per cent under bank base rate, giving a pay rate of 5.39 per cent with free valuation and legals. There is a £1,499 fee but, if borrowers can afford that, they will get an excellent rate which is cheaper than any fix on the market.

Homeowners who cannot cope with fluctuating repayments may have no option but to opt for another fix, even if it means paying more than on a variable deal. Products which can help to reduce the initial increase in payment, such as stepped fixed-rate trackers, may prove popular. Borrowers need to be aware that the cost will rise over the fixed term, so they will need to make provisions to cope.

In the short term, even though it has been much derided in case borrowers get into even worse trouble, swapping to interest-only for a couple of years will reduce monthly payments. It should be stressed that it is important to move back to a repayment mortgage once the client can do so or they are storing up bigger problems for later.

Extending the term is another solution. This will reduce monthly payments but the client will pay more interest over the term if they do not reduce it again at a later date. This can be done when the client remortgages again, perhaps when rates are lower and payments more affordable, or by overpaying as and when the client can afford to, clearing the mortgage more quickly.

Treating customers fairly means brokers have a duty of care to clients, particularly in what could be testing times. But on another level, there is a significant business opportunity, with an estimated £160bn of mortgages facing a payment shock next year. Brokers should be developing strategies to assist clients and grow their business at the same time.

Mark Harris is managing director of Savills Private Finance


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