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Stuart Gregory: Can your clients survive a payment shock?

Stuart Gregory MM blog

The question I get asked numerous times every week is: “When is the right time to review my mortgage?”

It is never an easy discussion, but I welcome the opportunity to discuss with clients and prospects their personal circumstances. It’s also useful to gather their thoughts about their finances in general.

With the Bank of England base rate at an all time low, many people are happy to sit on their current deals. But are your clients really safe to sit on their existing mortgage and wait for the Bank base rate to rise before taking action?

There is a longer term threat to borrowers that has so far received little coverage – the theory of payment shock.

With the base rate held at 0.50 per cent, we are in unprecedented times. Many borrowers assume they can wait until the rate rises before securing a new deal. But, could they potentially be better off long-term, by taking advantage of rates now?

Take the example of a £100,000 interest only mortgage on a variable rate of 2.5 per cent, based on a property value of £200,000, with monthly instalments of £208.33.

Currently, you could potentially achieve a five-year fixed rate of 2.95 per cent with monthly repayments of £245.83 – an immediate increase of £37.50.

However, it is important to consider what could happen if the alternative interest rates on offer increased in the future. If, after waiting to see what happens, instead of securing a five-year fix at 2.95 per cent, the best rate available has risen to 3.99 per cent, for example, then the monthly repayments would rise from £208.33 to £332.50 – an increase of £124.17 – over three times more than if they reviewed now.

That example is also based on ignoring any potential rises to the Bank base rate in the meantime.

In addition, many clients will have adapted their spending to meet their current low mortgage payments, including absorbing the increased cost of living through higher energy bills.

Every client and their personal circumstances are different, so some can absorb potential rate increases without a problem.

However, there are many borrowers who cannot and have a misconception that they can afford to wait until the base rate changes happen before securing their payments.

From speaking to clients, it seems many are unaware of the differences between how mortgage rates are priced and the outside influence of the money markets over pricing. Even though the Government’s Funding for Lending scheme will assist short-term, what happens beyond 2014?

Then there is the eurozone crisis. We haven’t heard those two words for a few weeks, but this is another issue that could affect mortgage pricing. And let’s not forget lenders’ ability to reprice when demand increases.

The payment shock will be a huge issue in future, which could push many borrowers over the edge financially, leading to more repossessions.

There is a lot of talk about the 2012 Olympic legacy, but my worry is that we will have a mortgage legacy from keeping the base rate low for so long.

Advisers need to break through the current apathy from borrowers towards mortgages and make it a priority for everyone to know where they stand.

Stuart Gregory is director of Lentune Mortgage Consultancy

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Comments

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  1. The idea of remortgaging now whilst interest rates are still low is fine in theory but, in practice, fraught with endless obstacles thrown up by lenders, not to mention all the various costs involved.

    Ive never been in the mortgage market but, from what I hear, the proportion of applications approved in principle but then rejected in practice is so high that it’s a wonder how brokers are surviving, especially those who don’t charge upfront fees.

    That aside, the prospects of the MPC raising the BBR are slim, as it knows the mayhem that so doing would probably cause in the housing market. Lenders have for some time benchmarked their offerings not against the BBR but against the LIBOR and inflation isn’t a major problem. Put all those factors together, and it’s hard to see much likelihood of anyone being galvanised into action by what this article suggests.

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