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The eye of the threadneedle

Bank of England bank rate is now at a historic low of 1 per cent. How low can it go? What do you think the monetary policy committee will do to bank rate at its next meeting?

Fitzgerald: With Bank of England bank rates at their lowest level in 315 years, the scope for more cuts is getting smaller. However, the UK economy is in a perilous state with rising unemployment and we may see a cut of between 0.25 per cent and 0.5 per cent at its next meeting.

In addition to this, the bank may well implement its policy of quantitative easing in the hope that this will increase the broad money supply and this will help to boost nominal spending in the UK economy.

There is also a good chance that the bank rate will gradually be reduced to 0 per cent by the year-end but this will further devastate savers and may have a negative effect on spending.

Hollingworth: The possibility of base rate hitting zero cannot be ruled out and it certainly looks like base rate has scope to get lower yet. In fact, the minutes for the MPC meeting in February showed unanimity in the decision for a cut in bank rate and the inflation report fails to discourage the opinion that further cuts look likely. Therefore, even though we are already at an historic low, it is certainly hard to rule out the possibility of a further cut as early as next month.

What impact that will have is another question and the MPC has also made clear that it feels other measures will be necessary.

Pratt: The Bank of England are obviously keeping open the option to reduce the bank rate further but I believe it is not a strategy they wish to pursue unless absolutely necessary.

I expect there will be no further bank rate change for three months while the effect of the recent rate cuts can be seen on the UK economy. The Bank of England will now seek other monetary initiatives to release funding and help stimulate the level of funding.

Northern Rock has been accused of offering clients direct remortgage deals with Cheltenham & Gloucester. Have you seen any evidence of this? Do you think it is acceptable for Northern Rock to go direct to advisers’ clients?

Fitzgerald: It has been reported that Northern Rock have been offering their clients direct remortgage deals with Cheltenham and Gloucester. I feel that a much better option would be for Northern Rock to send their clients to a mortgage adviser in the client’s area.

This way, the client could be sure of obtaining a complete review of their mortgage requirements and have access to the complete range of mortgage products from a wide range of lenders. It would also help to improve the relationship between Northern Rock and brokers to the benefit of all concerned.

Hollingworth: This is not an accusation, it is a fact and one that Northern Rock has not made any secret of. They announced some time ago they would be offering C&G deals to some Northern Rock customers reaching the end of their deals as a result of them no longer offering follow-on products. This will upset many brokers but I think the step was inevitable and, in effect, replaces any existing direct Northern Rock retention package. The key message to brokers is that they need to be on the ball and communicating with their existing client bank in a timely and effective manner.

Pratt: Northern Rock found themselves in a difficult situation last year during the period of nationalisation.

The selection of a panel of brokers to provide independent financial advice to customers is understandable but a better solution would have been to refer the customer back to the broker that introduced the business.

We have seen evidence that customers have been offered a specific C&G remortgage option but this is tolerated if Northern Rock have been given explicit instructions to run down the book of business.

This is, however, not acceptable while they continue to lend, possibly to an increased level over the coming months. There should be clear, transparent communication on what Northern Rock’s intentions are, both for taxpayers and brokers/customers.

Building society chief executives told MPs recently that the Government should consider returning bailed-out banks such as Bradford & Bingley to the mutual sector. Would you agree with this view? Do you think mutuals are a good model in times of financial crisis and will their popularity with customers increase in light of the turmoil?

Fitzgerald: Having worked for a mutual group for 25 years, I am well aware of the benefits of mutuality. During the recent discussions between the building society executives and MPs, there were some firm indications that returning some bailed-out lenders to the mutual fold should be considered.

It is interesting to note that over the past few weeks we have seen quite a few small mutual lenders appearing in the best-buy tables and I feel that a structured return of some bailed-out lenders to the mutuality fold would be popular with clients. This is because they see mutuality as a solid dependable way of conducting business.

Of course, we do need both types of business models in order to offer a varied and dynamic choice of products.

Hollingworth: A return for the nationalised institutions to the private sector has to remain the goal for all the bailed-out banks and it would be foolish not to consider all the options. The mutual sector continues to play an important role in the UK market even though there has been some contraction and consolidation. It should therefore not be ruled out but the question has to be how it would work and whether it is a practic- able solution.

Consumers will continue to see building societies as a safe haven and I would expect them to remain popular as long as their products continue to represent a competitive offering.

Pratt: The financial crisis has cut too deep to see lenders such as Bradford & Bingley being returned to the mutual sector. Most of the lenders have been acquired, apart from Northern Rock, and untying these deals will be almost impossible.

Apart from a few exceptions, the building society lenders have also not covered themselves in glory and hence the argument is hollow.

The building society lenders that have survived do, however, have an excellent opportunity over the coming years to expand their propositions and markets but they will need to improve their service offering and ability to process greater levels of new business.

How has mortgage business been in the first part of 2009?

Fitzgerald: Since returning from the long Christmas break, we have found that business is holding up quite well. There has definitely been an increase in first-time purchases and this may eventually start to move the market.

The major problem at the moment is that the 90 per cent rates are far too expensive and the market will only recover when those rates decrease. This will happen when lenders see property prices stabilising and liquidity improvingWe have also started to increase our sales of life and protection products and I feel it is important for all brokers to examine ways of selling other connected products.

Hollingworth: Tough, tough, tough! There is no getting away from the fact that a market expected to be less than half its level in 2007 will continue to pose challenges for brokers and lenders alike.

However, there are still plenty of products out there and customers keen to seek advice across the market. With bank rate reaching such a low, there will be plenty of borrowers on the search for a fixed rate in coming months.

They will also need to be wary of doing nothing due to the fact that level of equity continues to be a key driver for the available rates. With prices still falling, more and more will find themselves in higher LTV.

Pratt: The market continues to be a tough environment for a mortgage broker, with very limited lenders and products available. The remortgage market is effectively closed with the unprecedented base rate reduction, and new business rates are significantly higher than SVRs and direct offers from existing lenders.

Those mortgage brokers working with estate agents as introducers have, however, seen increased activity this year. The demand is there in homemovers and first-time buyers looking to take advantage of reduced house prices, the question is whether there is a finance solution available for them as lenders continue to focus on more than 75 per cent LTV products.

Figures from the Intermediary Mortgage Lenders Association show that two-thirds of first-time buyers cannot get a mortgage through their broker. What should the Government or lenders do to increase the availability of mortgages for first-time buyers? Do you think first-time buyers will be in a better position by the end of 2009?

Fitzgerald: You would think that falling house prices would help to increase the amount of first-time buyers able to purchase a property. The recent figures from Imla show that 58 per cent of first-time buyers were unable to obtain a suitable loan through brokers. As every broker knows, the main reason for this is the scarcity of decent rates at 90 per cent or above.

With bank rate at 1 per cent and heading lower, it seems incredible that lenders are charging rates around 6 per cent, and some big lenders have rates from 7 per cent for 90 per cent loans. Until this changes, the housing market will continue to slide.

I also feel a moratorium on stamp duty should be considered to help first-time buyers kickstart the housing market.

Hollingworth: The fact that house prices are falling is answering many first-time buyers’ prayers. If that continues, then FTBs will be in a better position as far as purchase price goes. However, at the same time, the constriction of mortgage finance for those with smaller deposits continues to be reason for concern.

Until better rates and choice at higher loan to value becomes available it will take all the longer for this crucial sector to return. Hopefully, the Government will be able to inject some vigour using the resource of the nationalised institutions.

Pratt: There is currently no stimulus for lenders to innovate products for first-time buyers. The Government needs to allocate further funding to the part/fully nationalised banks so that this money is directly lent to customers against defined products. Through this process, the Government can drive the target market and influence the product development process, although the pricing will be determined by the lender.

First-time buyers are very interested in the market and some have gifted deposits from friends/family. Further innovation on flexible guarantor and shared-equity products needs to be encouraged by the provision of further funding. This will also bring Northern Rock back into the market and help stimulate competition among lenders.


Jagged edge

2008 was an annus horribilis for equity investors as the credit crunch intensified and western economies slipped inexorably into recession.

Yield marshal

The recession and financial market turmoil is having unforeseen effects that providers and advisers need to consider when advising customers.


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